It’s a tale of rich bank versus poor bank
The chasm between haves and have-nots is widening
THE DIVIDE between the haves and the have-nots among Nigerian banks is widening.
The country’s biggest lender is so flush with cash it plans to repay $400 million (R 5.14billion) of bonds when they become due in November 2018 rather than raising additional debt, while the next two largest banks sold international bonds for the first time since 2014.
At the other end of the scale, smaller lenders are scrapping plans to raise dollar loans and struggling to find investors to raise capital.
Top tier banks in Africa’s most-populous nation and biggest oil producer are rallying after the central bank in April opened a foreign-exchange trading window, easing a crippling currency shortage that contributed to the worst economic contraction in 25 years. Smaller banks are lagging behind as they battle rising levels of non-performing loans and capital buffers near regulatory minimums.
“The gap between the Tier 1 and Tier 2 banks has been widening in profitability and balance-sheet size,” said Omotola Abimbola, an analyst at Afrinvest West Africa. “In the next one or two years we will probably see the trend extending further.”
United Bank for Africa, the third-biggest lender by market value, raised $500m in its first Eurobond sale on June 1 at yields below initial guidance. This followed an equivalent issue a week earlier by Zenith Bank in a deal that was four times oversubscribed. Guaranty Trust Bank, Nigeria’s largest lender, said this month it has no plans to sell Eurobonds, because it’s setting aside funds to repay existing debt.
By contrast, small- and-medium sized lenders like Wema Bank dropped plans last month to raise dollar loans to rather sell naira debt locally in smaller tranches. Unity Bank, which missed a February 28 central bank deadline to recapitalise, has been in talks with investors since October, while Diamond Bank started
16.3% The yields on Nigerian 5-year government bonds
negotiations to sell businesses and issue debt more than a year ago.
“We view the Tier 2 banks as potentially challenged,” Exotix Partners analysts Jumai Mohammed and Ronak Gadhia said last month. The lenders seem unable “to weather asset-quality deterioration storms.”
Still, the five-year dollar bonds didn’t come cheap. Lagos-based United Bank for Africa settled on a coupon, or interest paid twice annually, of 7.75 percent. That’s the highest of at least 10 sales of $500m by emerging-market banks this year. Zenith will pay 7.375 percent on the securities it placed.
Even so, more lenders will issue Eurobonds, because they need dollars to offer loans in the US currency or to repay debt, said Lekan Olabode, an analyst at Vetiva Capital Management in Lagos.
Lome, Togo-based Ecobank Transnational plans to sell a $400m, 5-year convertible bond this month, which will be used to refinance debt and provide short-term bridge funding for non-performing loans at its Nigerian unit, its biggest business.
Access Bank has $350m of bonds due in July, while Fidelity Bank has to repay $300m next May. “Any Eurobond issuance from the Tier 2 names will come in relatively more expensive – impacting margins,” Olabode said.
Some banks may use shareprice gains to sell equity, although most trade at less than book value, making a rights offering expensive, he said. Local debt also comes at a price, with yields on 5-year government bonds at 16.3 percent.
The Nigerian Stock Exchange Banking Index has advanced 44 percent this year, with United Bank for Africa soaring 99 percent to its highest since January 2014, while Access Bank has climbed 83 percent to a four-year high. Wema has gained less than 2 percent and Skye Bank and Union Bank of Nigeria are up about 10 percent in 2017.
Union Bank, in which former Barclays chief executive Bob Diamond’s Atlas Mara owns 31 percent, said in November it will sell as much as 50bn naira (R2bn) in a rights issue. The sale is still scheduled to happen by the end of this quarter, spokesperson Ogochukwu Ekezie-Ekaidem said on June 8.
Without enough capital to back new business and write loans, small lenders risk falling further behind as Nigeria’s economy recovers from last year’s 1.6 percent contraction. – Bloomberg