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Tuesday, 2 September 2014
Nigeria Too Big to Fail Bank Rules Spur Bond Rush: Africa Credit
Nigerian lenders are gearing up to sell the most debt in four years to bolster cash reserves, taking advantage of a drop in borrowing costs before the central bank increases how much capital they need to hold.
Banks may raise as much as $2.5 billion this year compared with $2 billion in 2013, according to FBN Capital, the investment-banking unit of Nigeria’s largest bank by assets FBN Holdings Plc. International debt sales are becoming more common as yields on Nigerian Eurobonds due July 2023 declined 96 basis points this year a record. That compares with an average 35 basis-point drop in emerging-market yields, according to Bloomberg indexes.
Nigeria’s central bank last month changed the way lenders calculate capital buffers to align Africa’s top oil producer with global standards and increase their ability to withstand losses five years after saving the industry from collapse. The regulator ordered Nigerian banks it considered too big to fail to boost minimum capital ratios to 16 percent last year, compared with 10.5 percent for South African lenders, which control most of the continent’s banking assets.
“Capital adequacy for many of the banks will be close to the minimum” once the changes are taken into account, Mike Nwanolue, an analyst at Lagos-based Greenwich Trust Group Ltd., said by phone on Aug. 28. “The capital adequacy levels for banks are expected to drop by about 3 percent across board, which will entail raising core capital.”
The Abuja-based central bank removed some assets lenders can count as capital in preparation for the implementation of Basel II and III, while limiting Tier 2 capital to 33 percent of Tier 1 capital, according to an Aug. 5 circular from the regulator. Minimum capital requirements for lenders with operations outside the country was kept at 15 percent and at 10 percent for those with interests only in Nigeria.
The changes will shave 100 to 400 basis points off the capital adequacy ratios of most banks, Adesoji Solanke, an analyst at Renaissance Capital in Lagos, said in an Aug. 11 note.
Wema Bank Plc, which focuses on the country’s Delta and Southwest regions, will be most impacted among smaller lenders, and United Bank of Africa Plc of the larger ones, Exotix Africa Equity Research analysts Ronak Gadhia and Kato Mukuru said in an e-mailed note on Aug. 7. Wema’s capital adequacy ratio will slip to 17.5 percent this year from 26.7 percent in 2013, and UBA’s to 17 percent from 22.6 percent, Exotix said.
“Banks want to show their capacity to protect depositors and absorb losses,” Sewa Wusu, an analyst at Lagos-based Sterling Capital Markets Ltd., said by phone from Lagos on Aug. 29. “A capital adequacy of over 20 percent is ideal.”
Policy makers in 2010 set up the Asset Management Corp. of Nigeria, which spent 5.6 trillion naira ($35 billion) buying bad loans while taking over three of the eight banks it rescued with a 620 billion-naira bailout. Two of the lenders, Mainstreet Bank Ltd. and Enterprise Bank Ltd., will be sold to new owners by Sept. 15, Amcon Chief Executive Officer Mustafa Chike-Obi said in June. Divestment of Keystone Bank will follow.
Nigerian banks with capital levels too close to the minimum will seek to raise Tier 2 capital rather than equity to avoid diluting shareholders, Oluwatoyin Sanni, chief executive officer of UBA Capital Plc, said in an e-mailed response to questions on Aug. 13. Eurobonds are a cheaper option than local debt as the “Nigerian market currently does not have the required depth and breadth,” she said.
The Nigerian central bank increased cash-reserve requirements on deposits made by government ministries and agencies and state-owned companies to 75 percent from 50 percent last year. It also raised requirements on private deposits to 15 percent from 12 percent in March to reduce liquidity and support the naira.
The capital changes are making it “tougher for banks to generate profits to pay as dividends,” Richard Segal, head of international credit strategy at Jefferies International Ltd. in London, said in an e-mailed reply to questions.
Higher spending by government and politicians before elections in February may cause foreign outflows at the same time as banks seek to finance power, oil exploration and manufacturing projects to feed an economy forecast to expand 6 percent in 2014.
“It is sensible for regulations to be prudent close to elections to ensure banks remain sound,” Segal said.
Stanbic IBTC Holdings Plc, the local unit of Johannesburg-based Standard Bank Group Ltd., the continent’s largest lender, said Aug. 7 it may raise 30 billion naira in bonds to support growth.
Yields on Access Bank’s $400 million of seven-year subordinated notes have dropped 78 basis points, or 0.78 percentage point, since they were issued in June to 8.72 percent. FBN Holdings sold $450 million of securities due 2021 in July, while Ecobank Transnational Inc. last month issued $200 million of notes maturing in 2021.
Rates on Nigeria’s government bonds maturing in nine years were unchanged at 4.96 percent by 4:13 p.m. in Lagos, the commercial hub, their lowest level ever. Speculation that the European Central Bank will boost stimulus amid signs of recovery in the U.S. economy is boosting demand for riskier assets.
“Banks that are ready will want to do it this year to take advantage of cheaper rates,” Sterling’s Wusu said.