13 August 2014

Nigerian Banks to Intensify Capital Raising

The recent adjustment of the modalities for computing banks' regulatory capital by the Central Bank of Nigeria (CBN) will bring about increased capital-raising for financial institutions.

The Managing Director/Head, Africa Research, Standard Chartered Bank, Razia Khan, who stated this in a note yesterday, pointed out that tier-2 debt issuance had already increased, with an increasing number of banks that raised dollar.

THISDAY findings showed that five banks - Zenith Bank, Access Bank, Diamond Bank, First Bank and Ecobank Nigeria - have so far raised a total of $1.750 billion from the dollar denominated debt market this year.

The CBN had announced the exclusion of non-distributable regulatory reserve and other reserves in the computation of regulatory capital of banks and discount houses.

According to the latest policy, 'regulatory risk reserves' would be excluded from any assessment of capital adequacy, while tier-2 capital would be limited to 33.3 per cent of tier-1 capital.

Also, impaired loans and receivables would be deducted from capital. In addition to these announced measures, the capital adequacy ratio for systemically important banks has increased.

"More forex-denominated issuance is still anticipated. Moreover, the cap on tier-2 capital will mean, potentially, more equity capital raising, encouraging more long-term, 'stickier' inflows.

"The overall effect of the new regulation will be to increase the capital-raising of banks. Tier-2 debt issuance has already increased, with an increasing number of banks able to raise their US dollar funding," Khan argued.

However, she noted that the supportive role of increased inflows may need to be balanced against other factors. Furthermore, she stated that the easy liquidity conditions domestically will need to be monitored carefully, especially as the election cycle (and party primaries) gets underway.

"Global risk appetite and any adverse market reaction to Fed guidance on policy normalisation pose an additional risk. For now however, we see higher inflows and some reduction in domestic forex demand as key factors supporting the naira," she added.

Nigeria's trade report for the first quarter 2014 revealed a 14.2 per cent quarter-on-quarter rise in exports, and an 8.3 per cent quarter-on-quarter fall in imports.

As a result, the trade surplus increased in the first quarter of 2014, according to the National Bureau of Statistics (NBS) data. Also, CBN data for the first quarter of 2014 had shown some recovery in crude exports over the fourth quarter of 2013 levels, although the price of Bonny Light softened over this time.

Despite the increase in Nigeria's trade surplus, the naira was largely pressured in the first quarter of 2014, reflecting sentiment-driven outflows. But, forex reserves have recorded some accretion in the past two months.

"While officials suggest that the rise in forex reserves is because of continued recovery in crude exports, we believe that improved sentiment towards Nigeria, some recovery in risk appetite, and increased inflows have played a key role.

"The reduction in BDC activity given the increased capital requirement for this sector and consequent reduction in local forex demand has also helped the recovery in forex reserves," Khan maintained.


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