Business
Moody’s rating exposes poor state of banks
. Experts predict more recapitalization next year
FELIX OLOYEDE
Deposit Money Banks (DMBs) in the country have been caught in the web of liquidity squeeze, capital adequacy challenge and the encumbrance of raising fresh funds as Moody’s Investors Service (Moody’s) downgraded their long-term local currency deposit and issuer ratings.
The credit rating agency lowered the baseline credit assessments (BCAs) of Access Bank Plc (Access), Guaranty Trust Bank Plc (GTBank), United Bank for Africa Plc (UBA) and Zenith Bank Plc (Zenith) while the Bank of Industry (BOI) came down from B1 to B2. It also downgraded GTBank, UBA, Zenith, Union Bank of Nigeria plc (Union), First Bank of Nigeria Limited (FirstBank) and Sterling Bank long-term foreign currency deposit ratings to B3 from B2.
This downgrade came few days after Moody’s lowered Nigeria’s sovereign rating to B2 stable from B1 due to the country’s failure to diversify its resource base, which is currently solely crude oil export. The government has, however, faulted the downgrade, saying the country has seen significant improvement since its last rating in 2016.
Nigerian banks have been making frantic efforts to shore up their liquidity and capital adequacy ratios occasioned by the 16 months economic recession Nigeria suffered between first quarters of 2016 and second quarter of this year, before the country’s economy rebounded, growing 0.55 per cent. The National Bureau of Statistics is due to announce the Q3 GDP figures on today.
Many of the lenders have concluded plans to raise fresh capital through right issues and Eurobonds. Union Bank just recently concluded its N50 billion right issue and Ecobank also in August issued a US$200 million Eurobond at 8.75 per cent due for 2021.
ZenithBank and UBA had raised US$500 million, which were oversubscribed by thrice and 2.4 time respectively. And Fidelity and Guaranty have Eurobonds that will be maturing in 2018 with expectation of possible refinancing through new issuances. And Fidelity on October 13 2017, successfully issued another $400 million Eurobonds at a coupon rate of 10.5 per cent.
The recession induced by drastic fall in crude oil prices at the international market, made banks’ non-performing loans (NPLs) to balloon to 13 per cent, smashing the 5 per cent prudential benchmark. The commercial lenders’ liquidity challenge was worsened by the implementation of the Treasury Single Account (TSA) in September 2015, which saw public funds moved from banks and warehoused with the Central Bank of Nigeria (CBN).
The President Muhammedu Buhari’s fight against corruption and the introduction of Bank Verification Number (BVN) also added to the lenders’ woes, which made it difficult for corrupt government officials to launder money through banks.
“It is a little tough. Nobody would want to buy into a name that they doubt will be able to continue business. But because the right issue is coming at a discount, I don’t have any doubt they people will take up the right issues of tier one banks. But what is doubtful is when they want to raise Eurobonds,” said Victor Ukpai, Risk Manager at Stanbic IBTC pension Managers Limited in a telephone chat with BH.
He further explained that the downgrade of the banks’ credit rating would likely adversely affect the quality and volume of business that would come into this country through international investors.
“It will also have a great impact on the number of people that would want to subscribe to the debt instruments of these banks.
“They may not want to buy the debt securities of a bank that they are not very sure it will be able to pay back, because they are junk bonds. Institutions would not want to have junk bonds in their kitties. It will also affect the GDR (Global Depositary Receipt) of these banks. Their stock prices and Eurobonds will be negatively impacted,” he said.
Consequently, commercial lenders’ cost of funds is expected to go up, because they have to pay more to get funds from the international market and this would aggravate the challenge of raising credits by the real sector which has been fund starved.
“People who want to lend money to banks will ask for money interest. So, interest rate may go up from the banks’ perspectives to lenders. Cost of capital will go up. The banks problem is caused by the government. The federal government is borrowing heavily both domestically and internationally and crowding out other players,” notes Professor Leo Ukpong, a financial economist and dean, School of Business, University of Uyo.
For Emmanuel Cobham, Director-General, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), it is a bad omen.
“This downgrade would compound the woes of the real sector because it will make the banks further unwilling to extend credits to the sector. This downgrade showed that the banks have to take extra measures to be able to regain the confidence of investors.”
Experts have been urging the CBN to lower its monetary benchmark rates to give banks more liquidity. Although some of them believed the Monetary Policy Committee (MPC), which meets in Abuja on Monday and Tuesday, would maintain status quo and may only consider tinkering with the rate in the first quarter of 2018.
Dr. Adi Bongo, economist and faculty member, Lagos Business School opined that the downgrade was a fallout of the poor macroeconomic management that started last year, adding that the banking industry suffered a huge capital flight as portfolio investments that were plugged into banks during the consolidation period, were pulled out when investors were not certain about the future.
He further explained, “Nigeria has been performing badly in capital importation rating. As money began to leave the system, banks where majority of the portfolio investors invested, started having liquidity challenges.
“And because of the state of the economy, non-performing loans in banks have increased tremendously. The combination of these two issues has made banks to be having serious challenges, except those that have strong asset base have been able to whether through the storm.”
“The banks have very limited options. An option for some may be seeking for merger and acquisitions. In a few couple of months, we may see the same situation we saw in 2005 when banks merged together in order to save themselves,” Bongo noted.
Mr. Johnson Chukwu, Managing Director, Cowry Assets Management Limited reasoned that downgrade of the banks was expected, following the lowering of the country’s sovereign bond rating.
“You can’t have a risk rating that is higher than you country’s risk rating. It could be a drawback for banks trying to raise money from outside the country. But there are other ratings,” he posited.
“I don’t think it will have a dramatic effect on their ability to access credit from outside the country.”
Afrinvest Nigerian Banking Report for 2017 released recently stated that though the majority of Nigerian banks have been able to weather the economic storm in the country, which hampered credit expansion, asset quality and capital adequacy in the last two years, their exposure to “high risk sector” will continue to mount pressure on their capital adequacy ratio.
It added that commercial lenders would seek refuge in Eurobond issuance to shore up their capital adequacy and liquidity level.
