As the Central Bank of Nigeria (CBN’s) on-going intervention in the foreign exchange market brings about a gradual return of confidence to the financial system, some of the country’s big banks have been rolling out new plans to raise capital to boost their operations.
Less than two months after it cancelled plans to raise N100 billion from the capital market citing what it said was weak market conditions caused by Nigeria’s struggling economy, one of the country’s biggest lenders, Zenith Bank, announced on May 11, that it intends to raise about $500 million in the second tranche of its $1 billion Global Medium Term Note Programme (GMT). The bank had established a $1 billion GMT programme in 2014 and had raised $500 million under the first tranche of notes issued. In a notification to the Nigerian Stock Exchange (NSE), Zenith Bank said the proceeds of the second tranche of the notes would be utilised for its general banking purposes.
“As was done in the first tranche notes, the bank intends to issue the second tranche notes directly but will retain the flexibility to issue through an offshore special purpose vehicle where market conditions require and allow same,” Zenith Bank said in the statement.
It further stated that as was the case with first notes that were listed on the Irish Stock Exchange (ISE), the second tranche would also be listed on the ISE. The notes quickly got an expected rating of ‘B+(EXP)from the international credit rating agency, Fitch Ratings, which also assigned it a Recovery Rating of ‘RR4’, denoting average recovery prospects in the event of default. Exactly a fortnight after the Zenith Bank announcement, another Tier I lender, United Bank for Africa (UBA), also announced plans to raise $500 million senior unsecured medium term debt notes to be used in strengthening its general banking operations across Africa. In a statement signed by the Group Company Secretary, UBA, Mr. Bili Odum, the lender said the Central Bank of Nigeria (CBN) and Securities and Exchange Commission (SEC) had given approvals to the $500 million debt notes transaction, adding that the notes will be listed on the Irish Stock Exchange (ISE), with the expectation that they will be traded on its regulated market. According to the statement: “UBA will pay the net proceeds from the notes issuance into its foreign currency domiciliary account, which may be retained by UBA in foreign currency or converted into naira, depending on UBA’s requirement from time to time.
“A Certificate of Capital Importation (CCI) will not be obtained in respect of the proceeds of the notes that are not converted into naira because a CCI is only issued in respect of capital imported into Nigeria and converted into naira. UBA intends to make principal repayment and interest payments on the notes from its foreign currency reserves, since it will not be able to obtain access to the Nigerian foreign exchange market for the purpose of making such payments. “Notwithstanding the forgoing, UBA will obtain the approval of the CBN to access the official foreign currency reserves if for any reason UBA does not have sufficient foreign currency reserves to meet the principal and interest payments due on the notes.”
Like Zenith Bank’s, the UBA notes also received favourable rating from Fitch, which assigned them an expected rating of ‘B (EXP)’ and an expected Recovery Rating (RR) of ‘RR4 (EXP)’. The agency stated that the expected rating was in line with UBA’s Long- Term Foreign-Currency Issuer Default Rating (IDR) of ‘B’, adding that in its view: “the likelihood of default on these notes reflects the likelihood of default of the bank.” Forex measures restore confidence
In fact, industry sources told New Telegraph last weekend that Zenith Bank and UBA announcements could be a precursor to similar actions by lenders in the months ahead as market sentiments have improved so dramatically in the last few weeks as a result of CBN’s forex measures that more lenders would feel confident enough to unveil their plans. Specifically, the consensus of opinion among financial experts and stakeholders is that the renewed confidence in the market was triggered by the apex bank’s creation of an investors’ and exporters’ fx window on April 21. The window, which gives investors the opportunity to sell and forex at market determined rates has led to a narrowing of the gap between the official and parallel markets’ rates of the naira to the dollar, a key demand of foreign investors.
For instance, market watchers believe that the rally recorded on the Nigerian Stock Exchange (NSE) between April 21 and May 12 could be linked to the opening of the investors’ forex window. Statistics show that the market capitalisation rose by N1.03 trillion to close at N9.746 trillion on May 12, 2017 from the N8.716 trillion it closed trading on April 21, 2017. Also, the All-Share Index (ASI) increased by 3,003.09 points or 11.92 per cent to close at 28,192.46 on May 12 from 25,189.37 on April 21, 2017. Similarly, last Tuesday, the overall market index hit its highest in more than 10 months with First Bank Holdings leading a rally of banking stocks. First Bank Holdings, the parent company of the country’s oldest commercial lender First Bank, rose 10.02 per cent in early trade on that day to N5.38, a level last seen on October 10, 2015. Also, UBA was up 3.73 per cent at N7.80 per share, while Zenith Bank rose 8.63 per cent to N20.78.
Commenting on the plans by Zenith Bank and UBA to each raise $500million medium term debt notes, Chief Executive Officer of the Cowry Asset Management Limited, Johnson Chukwu, stated on a business programme recently that the development: “Is an indication that we are turning the corner. It shows that the dollar outlook is improving,” adding that the lenders announced the capital raising because they were confident that the concerns foreign investors had about the CBN’s forex policy have been addressed.
A capital raising foretold
Interestingly, in a report entitled: “Capital Adequacy: Pulse Check” released in early February this year, the investment and research firm, CSL Stockbrokers Limited, predicted more banks were likely to raise capital in 2017 to enable them cope with the impact of the struggling economy as well as the weak naira. The report stated that asset quality remains a problem for the industry, pointing out: “If a bank suffers an unexpected rise in Cost Of Risk (COR) that exceeds the capacity of one year’s profits to absorb it, then that bank will be looking at writing down capital.” The study, which analysed banks’ nine month 2016 results, noted that their Capital Adequacy Ratios (CAR) showed that many of them would be forced to embark on capital raising activities if macroeconomic conditions did not im- prove.
The report stated: “Capital adequacy is a persistent issue for a number of Nigerian banks. Regulatory capital ratios have been impacted by the large depreciation of the naira given the extent of dollar lending in the sector. They have also been hit by the sharp rise in impairments (implying little or no retained earnings).
“The Central Bank of Nigeria (CBN) requires that banks with international subsidiaries maintain a Capital Adequacy Ratio (CAR) of 15 per cent while banks without international subsidiaries maintain a CAR of 10 per cent. The minimum requirement for systemically important banks (effective July this year) is 16 per cent.”
The report stressed that the options available to the banks are limited in the current macro environment, adding that sourcing naira bonds had become quite difficult for banks because of high interest rates on treasury bills and FGN bonds. However, it stated: “Despite challenges in the raising naira bonds, the expectation is that local currency bonds would remain the favoured option, especially for the mid-cap lenders.” The report noted: “Rights issues would be very dilutive given low share prices while raising tier- 2 capital, by issuing long-term dollar subordinated debt, is difficult as US dollar rates can be so high as to make the exercise unprofitable in terms of spreads on US assets.”
It will be recalled that mid-sized lender, Sterling Bank announced in March that it would issue a N27 billion bond this year to boost lending. The bank’s Chief Financial Officer, Abubakar Suleiman, was reported by news agencies as saying that the lender expected to get clarity on the economy by the end of the quarter, including interest rates. He said the bank raised only N8 billion last year via bonds because of high interest rates. Similarly, another mid-sized lender, Wema Bank, announced last month that it intends to do a N20 billion issue by end of second quarter or early third quarter of this year. The bank’s, Chief Finance Officer, Tunde Mabawonku, was quoted by Reuters as saying : “We intend to do a N20 billion issue by end of second quarter or early third quarter.”
He stated that the debt raise will boost capital ratios to 14 per cent, adding that the mid-tier lender needed about N8 billion to reach that level. Mabawonku said the lender would also raise equity afterwards, likely next year. He said that Wema had registered a N50 billion bond programme and had appointed advisers for the debt sale this year. Also on the capital raising train is Union Bank Plc. Earlier this month, at its 48th Annual General Meeting (AGM), shareholders of the bank approved its plan to raise about N50 billion in Tier 1 capital via rights issue in the second quarter of 2017.
According to analysts, while the CBN’s forex measures have played a key role in restoring confidence to the financial system thereby making it more convenient for banks to come to the market for funds, lenders have such a great need for capital that with or without the apex bank’s intervention, they would still have found a way of addressing the issue.