‘Investors in Nigerian banks may still be reluctant’

Investors may still be reluctant to invest in the nation’s banking sector, despite the higher earnings reported in their half-year results.

Some Nigerian banks reported higher earnings in their mid-year results, but finance experts say this may not be sufficient to woo investors.

Bismarck Rewane, the managing director of Financial Derivatives Company, a finance and research firm, said investors are still unenthusiastic.

“Earnings are up by 10.64 percent across the board,” he said, but added that investors were still “too fatigued to respond. Some say we’ve seen this before,” adding that thoughts of ‘once bitten, twice shy scenario’ are lingering.

Factors contributing to earnings growth, according to him, include “higher asset yields leading to higher net-interest margin in contractionary monetary environment and growth in non-interest income lines including trade finance and transaction fees.” Nigerian banks have been undergoing reforms by the Central Bank of Nigeria since 2009. While they all had to adhere to stricter regulations, a few had to be rescued, as their situation was said to be grave. The banks have since been searching for and luring investors. The nationalisation of three of the rescued banks by the Central Bank last week is gradually bringing a close to the banking reforms introduced about two years ago.

Citing an apparent lack of capacity or ability to recapitalise before the given September 30 deadline, the Nigeria Deposit Insurance Corporation (NDIC), supported by the Central Bank, last week, withdrew the banking licences of three of the eight intervened banks (Afribank Plc, Bank PHB Plc and Spring Bank Plc.) and effectively nationalised them by getting the Asset Management Corporation of Nigeria to recapitalise and manage them for a period, till they are able to attract new investors.

“This brings down the curtain on the resolution process for the intervened banks,” Renaissance Capital, an investment bank said in a sector update bulletin titled ‘Nigerian banks: closer to the end of reforms’.

According to Regional Head of Research, Africa, Standard Chartered Bank London, Razia Khan, the authorities’ pre-emptive action, in stepping in early to safeguard a small number of institutions and guarantee their deposits, may have protected the wider financial system. “With the banking sector crisis drawing to a close, and remaining interbank guarantees to be lifted by the end of December 2011, we expect further successes in deposit mobilisation and financial intermediation.” The present picture shows four of the eight signing transaction implementation agreements (TIA) with new investors; another finalising discussions with a prospective investor(s); and of course, three being nationalised.

According to Asset quality Renaissance Capital, asset quality concerns have fallen way down the risk ladder in Nigeria.

“Though concerns around the naira may now come to a head given global growth and short-term debt financing issues in peripheral Europe, Nigerian banks balance sheets are 80 percent naira funded on the asset and liability side, on average.” However, given the current global worries around growth in the US and short term debt financing issues in peripheral Europe, the most significant feed-through for Nigeria is in oil price, which may make investors question the strength of the naira and impact for Nigerian banks.

According to Mr Rewane, concerns about the global economy rippled through financial markets driving down share prices from Tokyo to New York, placing new strains on Spanish and Italian bonds. After the US debate, investors shifted their attention to evidence that the global economy was weakening.

“Nigeria is taking limited advantage of the commodity boom as non-oil exports still less than 5 percent of total exports. Nigerian banks are expected to face stronger scrutiny from regulators in line with global practice. Fragility of the global economy will reduce foreign capital inflows to Nigeria.”

Concerns remain

Looking at both sides of the challenging situation, Afrinvest, a research and investment firm, said: “On the balance, we view these steps as positive as it effectively draws a firm line on the process of recapitalising Nigeria’s troubled banks. In our view, the actions of the Central Bank were well thought out and we think it will have a long-term effect of stabilising the system having avoided a looming systemic crisis that the relative illiquidity of these banks portended.

“Indeed, we expect a backlash from minority shareholders who may view this as an infringement of their rights. While we also expect these banks to come under significant pressure from depositors, we expect that Central Bank guarantees should prove adequate for managing the expected flight to safety and hopefully, stabilise the run down the line,” the firm said.

Industry watchers expressed surprise at the Central Bank’s decision to nationalise the banks and said the decision could cause a stir in the Nigerian banking system and indeed the economy as the probability of a run on those banks is very much likely in the coming weeks.

There has also been fears that the action of the regulator could potentially raise questions regarding the objectivity and timely execution of the reform process initiated in 2009.

“We believe the impact of this action on the equities market will be markedly negative, given the challenges in the global economy and the renewed concerns about the downturn in recent weeks. This assumes even more frightening proportions when considering the apparent lack of investor confidence in the domestic retail segment,” Afrinvest had said earlier in a flash note.