Despite the global fi nancial volatility and a dramatic fall in the value of bank shares on the stock market, the industry in nigeria has proved very resilient and is fully expected to ride out the storm. The watchword now, argues moiN siDDiQi, is consolidation, rather than expansion.

32 FEATURE AfricAn BAnker 2nD QUARTER 2009

africa and the credit crunch

In the ‘toxic’ environment of today’s international banking system – with regular rating downgrades and colossal subprime asset write-downs leading to plummeting share prices of tarnished fi nancial institutions (notably Citigroup, UBS and the UK’s Royal Bank of Scotland, among others), there are few countries, if any, which have

nigerian banks will ride it Out

the lAgos skYline is dominAted BY nigeriA’s BAnks, Which hAve lArgelY escAped the ruinous fAllout from toxic Assets.

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escaped the severity of the credit crunch.So far, Nigeria’s major banks have proven resilient in withstanding

the external shocks of an oil price collapse, dwindling capital inflows (portfolio, foreign direct investment and remittances), as well as limited trade finance/credit lines from foreign banks.

They must, however, adjust to a slower global economic growth and revenue contraction after enjoying an era of spectacular expan-sion of financial assets and customer deposits following the 2005 consolidation exercise.

In recent years, private capital flows have risen faster in Nigeria than in other parts of Africa, resulting in a positive impact upon the financial services industry.

Nigeria, West Africa’s powerhouse, is unlikely to experience a systemic banking crisis. Unlike OECD-based financial institutions, Nigeria’s banks steered clear of the risky, but once so attractive, asset classes such as Collateralised Debt Obligations (CDOs), Structured Investment Vehicles (SIVs) and Asset-Backed Securities Index (ABS)

– the latter is an index of ‘credit default swaps’ tracking 20 bonds col-lateralised by sub-prime mortgages.

In common with most African banks, Nigerian banks followed a highly conservative strategy of investing in US Treasury bills, govern-ment bonds and certificates of deposit.

The market in the so-called ‘mortgage-backed securities’ wiped several billion dollars off the balance sheets of many of the West’s banking giants. Top US and European banks had demonstrated a magnificent failure of risk management. Concurrently, excess leverage (i.e. saddling banks’ balance sheets with a high debt-to-equity ratio) and uncertain credit quality caused confidence in the financial sec-tor to collapse, leading to a virtual blockage of interbank and money markets. There followed the sharp retrenchment of credit.

By contrast, the interbank market is functioning smoothly in Nigeria. Liquidity has not dried up and the Central Bank of Nigeria (CBN) is not under the same pressure as its US and European coun-terparts to inject vast amounts of credit into their banking systems.

DomesTiC FoCUsAmid worldwide anxiety over the safety of private savings, Nigerian banks received a clean bill of health from the National Deposit Insurance Corporation (NDIC), one of the Nigeria’s financial regulatory agencies.

Ganiyu Ogunleye, managing director of NDIC, said: “We can assure [the public] that currently Nigerian banks are quite healthy. And whoever says they are weak, maybe they need to know that the indicators we have in terms of their capital adequacy or liquidity suggest that they are well posi-tioned to discharge their mandate and also deliver financial services. That is the position as far as we are concerned.”

True, Nigerian banks are

somewhat insulated from the global financial meltdown because they do not rely solely on overseas funds for conducting their domestic-based operations. The sector is neither heavily leveraged (i.e. burdened with excess debt) nor overexposed to external financing like most Eastern European banks. According to reports, lending by foreign banks to Poland, Czech Republic, Hungary, Romania and Ukraine have amounted to $303bn, $192bn, $155bn, $124bn and $57bn respectively.

But Nigeria is in the early stages of creating a fully-fledged market for secondary debt and derivatives and banks generally rely on term deposits to fund loan portfolios that remain on their books until maturity. Very few, in fact, securitise pre-existing assets or other receivables.

Until last year, the aggregate credit to the private sector was growing ‘too high’ according to the World Bank. CBN figures show credit to the private sector jumped 61% from N4.6 trillion ($39.61bn) in 2007 to about $54bn by end-2008 – equivalent to nearly one third of gross domestic product. On the liability side, demand deposits and quasi-money registered 55% and 49% year-on-year (YoY) growth respectively in December 2008.

Meanwhile, total deposits (i.e. demand deposits plus quasi-money) rose 52% YoY in December 2008. The term quasi-money refers to ‘near money’ or liquid assets, such as bank time-deposits, Treasury bills and money market funds that are easily converted to cash on short notice.

The global downturn, reflected in weaker oil prices (from a peak of $147/barrel to less than $40) and capital outflows, as well as contraction in private investment, will reduce Nigeria’s GDP growth from 6.4% in 2008 to 4–4.5% – at best – in 2009. Lending to the non-oil economy that has fuelled growing prosperity in recent years is likely to drop as petrol-dollars flowing into the domestic banking system start to dry up. The federal and other tiers of government now hold less cash for deposit placements.

Renaissance Capital, the emerging markets’ investment bank, expects deposit growth of only 23% YoY during 2009, with adverse effects on new loans. Credit growth has slowed in the first quarter of this year. Renaissance Capital expects bank lending to increase 20%

YoY in 2009, down steeply from 111% and 52% respectively in 2007 and 2008.

With low appetite for risk, plus a need for improved liquidity lev-els, Nigerian banks are effectively deleveraging their balance sheets. This practice of debt shedding, or paying off existing loans, is now common among Western banks. According to the International Monetary Fund (IMF), European and US banks will contract their balance sheets by $2 trillion per annum over the medium term, thus leading to a sharp retrench-ment of global credit for businesses

– including in Africa where new capital is vital for business start-ups and expansion.

Growth slowdown could im-

Many industry insiders are concerned about the rapid

growth of ‘margin lending’, i.e. when a bank loans money

for share transactions. Easy short-term credit also

led to soaring valuations inconsistent with market

fundamentals, and exposed a lack of oversight and risk management by lenders.

36 FEATURE AfricAn BAnker 2nD QUARTER 2009

pact bank balance sheets by increasing provisions for bad debt, thereby reducing profitability and lending. In recent years, major banks have extended project and corporate finance on forecasts of robust earnings growth and strong commodity prices (especially metals and oil). In the credit crunch, the greater risk aversion of lenders could result in some loans being recalled.

In this environment, capital-intensive projects in Nigeria will face hurdles in tapping bank financing and where they do, will pay higher interest rates.

Nigeria’s financial stocks have taken a severe blow as the Lagos All-Share Index slumped from the 5th March 2008 peak at 65,000 points to a trough of 21,893 points on 6th March 2009 – representing a hefty 66% fall over the one-year period.

Banking shares comprise about half of Nigeria’s stock market capi-talisation, which stood at $34.3bn last March. A combinations of factors have weighed down on equities: the divestment by foreign investors, exchange rate volatility and the likelihood of subdued earnings, as well as the global market meltdown that shows no signs of abating.

Many industry insiders are concerned about the rapid growth of ‘margin lending’, i.e. when a bank loans money for share transactions. Easy short-term credit also led to soaring valuations inconsistent with market fundamentals, and exposed a lack of oversight and risk management by lenders.

The extent of risk is difficult to judge without reliable data, but the CBN calculated the 24 Nigerian banks’ exposure to Nigeria’s capital market (i.e. lending to the private sector to invest in the stock market) at below N900bn ($6.18bn at current exchange rates) equivalent to 12% of total credit to the private sector by the end of 2008. Private estimates, on the other hand, are closer to N1.4 trillion ($9.6bn) which is 4.7% of GDP – high by global standards– and there is also confusion in Nigeria over what constitutes a margin loan!

The value of portfolio investments, as elsewhere, has depleted to a point where margin exposures could become non-performing loans (NPLs), thus reflecting widespread defaults amid tumbling equity prices. This would, in turn, exert pressure on lenders for bad debt provisions and eventual write-downs.

By contrast, the interbank market is functioning smoothly in Nigeria.

Liquidity has not dried up and the Central Bank of Nigeria (CBN) is not under the same pressure as its US and European

counterparts to inject vast amounts of credit into their banking systems.

remi BABAlolA, nigeriA’s minister of stAte for finAnce, descriBes lArge internAtionAl hedge funds investing in nigeriA As “Acting like A mAgnet for others”.

The CBN is, however, confident that individual banks will not experience solvency and liquidity problems by loan defaults. “Rate of profitability may reduce but large-scale losses may not occur,” stated CBN.

Despite worries about margin lending, banks remain well capital-ised with an average capital adequacy ratio of 22% – one of the highest in the world. In 2008, tier-1 capital (i.e. shareholders’ funds) of the 24 Nigerian banks stood at over $20bn. Renaissance Capital estimates the sector could write off $7.3bn of NPLs against its equity and still exceed minimum capital requirement.

respoNDiNg To CoNTagioN impaCT The authorities have taken action to preserve the financial sector’s stability. The Presidential Steering Committee on Global Economic Crisis was formed last January to suggest ways of dealing with market volatility and the Nigerian Stock Exchange (NSE) reviewed trading rules and regulations.

The previously 1% maximum downward cap and 5% upward movement on daily price movement were harmonised to 5% either way from the end of October 2008. All capital market operators’ fees were reduced by 50%.

In January 2009, the CBN appointed ‘Resident Examiners’ to attend board and management meetings as observers and investigate operations as a means of improving overall supervision.

But a continuing problem is that end-year results in Nigeria are

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not harmonised, which encour-ages excess interbank lending as reporting banks can borrow on the interbank market to shore up their balance sheets. The CBN has instructed registered banks to report end-of-year figures in December.

The CBN, like central banks elsewhere, has given assurances that ample credit is available to support the industry’s lending activities. Gross liquidity injec-tions by the CBN, through an expanded discount window and the repayment of maturing ‘OMO’ bills during September 2008 and January 2009, totalled $16bn. That, in turn, helped interbank rates to drop below the Monetary Policy Rate (MPR) – currently at 9.75%.

OMO refers to the purchase and sale of government and other eligible securities by the CBN in the open market. Other supportive measures include expanded lending facilities to commercial banks for one year; a reduction in cash reserve requirements from 4% to 2%; a reduction of the liquidity ratio from 40% to 30%; and direc-tives to banks that they have the option to reschedule margin loans up to late 2009.

One piece of good news is that Soros Fund Management, owned by George Soros with $20bn in assets, has expressed interest in Ni-geria’s banking stocks, where valuations are now attractive on their forward price/earnings ratio after recent hefty falls.

Two other big – unnamed – US and European hedge funds have

also visited Lagos, the commercial capital. Remi Babalola, Minister of State for Finance, said: “What makes it interesting is that they are the first to come since the glo-bal financial crisis, and since the departure of most other investors from the market. It’s going to be a magnet for other investors to come in.”

Victor Osadolor, group chief financial officer at UBA, echoes this view: “These are sophisticated

investors, so they understand where to come in. There are plenty of bargains.”

Nigeria, despite fiscal and balance of payments pressures, is not in bad shape. Merrill Lynch ranked Nigeria among the world’s 10 least-vulnerable developing economies based on seven criteria: current account financing gap; forex reserves/short-term external debt ratio; the export/GDP ratio; the private credit/GDP ratio; the private credit growth; the loan/deposit ratio; and banks’ capital asset ratio.

Nigerian banks should encourage an image of conservatism and stability, which bodes well in the current risk-aversion climate. Priorities for this year and next will be consolidation rather than expansion.

The long-term outlook for Nigeria’s financial industry is positive, buoyed by hydrocarbon wealth, solid growth potential and a large population equal to one fifth of sub-Saharan Africa’s total, yet with limited access to banking services. n

The CBN, like central banks elsewhere, has given

assurances that ample credit is available to support the

industry’s lending activities.

BAnking shAres comprise Around hAlf of nigeriA’s stock exchAnge cApitAlisAtion.

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