Home Cover Story Banks unable to raise fresh capital, Analysts cite worsening economy

Banks unable to raise fresh capital, Analysts cite worsening economy

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By OKEY ONYENWEAKU

These are not the best of times for Nigerian Banks as the problem of inadequate equity capital seems to be primed to last for much longer. With a weakening economy that has shrunk by -0.38 per cent in the first quarter of 2016 and which is expected to have done worse in the quarter to June; banks have unsuccessfully scampered to raise fresh funds to finance loans as both local and foreign sources of money dry up.
Of late, the Nigerian capital market has been incapable of providing the needed funds required to fortify the equity standings of several listed companies in the clutches of debt overhangs.
Debt to equity ratios have risen sharply in the last two years as investors pull money out of the financial system, making Initial Public Offerings (IPO’s) improbable.

Given low market returns (the All Shares Index (ASI) has lost -2.21 per cent year- to -date and -2.12 per cent year- on -year, investors are reviewing their portfolio’s and are drifting to sectors which offer better returns.
Indeed, money market instruments appear to offer better yearly returns although these too are only slightly appealing after being adjusted for inflation which In June 2016 had climbed to 16.5 per cent per annum. Investment windows such as treasury bills, term deposits, Savings account, and corporate bonds still seem to gather some muster amongst investors.

”I’ m not optimistic at all. Banks are in more trouble than we can imagine”, a former managing director of one of the big banks who declined being named in print, said.
Analysts suspect that any public offering or Rights issue packaged at this moment would fail. This is because investors are already weary and have little or no money to spare for investment.
Fear of failure in initial public offers has compelled banks to look elsewhere for terribly needed money; banks have shifted attention to other sectors to source capital for their operations.
Quite a few local deposit money institutions (DMB’s) appear to struggling to maintain regulatory prudential ratio’s in respect of their capital adequacy, liquidity and non-performing loans (NPL’s).

‘’I’ m not optimistic at all. Banks are in more trouble than we can imagine”, a former managing director of one of the big banks who declined being named in print, said.

Analysts suspect that any public offering or Rights issue packaged at this moment would fail. This is because investors are already weary and have little or no money to spare for investment.
Fear of failure in initial public offers has compelled banks to look elsewhere for terribly needed money; banks have shifted attention to other sectors to source capital for their operations.
Quite a few local deposit money institutions (DMB’s) appear to struggling to maintain regulatory prudential ratio’s in respect of their capital adequacy, liquidity and non-performing loans (NPL’s).

However, the once verdant capital market appears to be a no go zone for now, given the depressed nature of the economy. It is also feared that not even debt financing is easy.
While some banks are still struggling to pay off earlier issued foreign-currency denominated corporate bonds, others are grappling with the awkward imperatives of local instruments.
The foreign-currency denominated debt of banks has become an albatross as the crash in the external value of the naira in June and July has compromised the ability of local banks to meet both the coupon and principal payments of the debts, leading to a down grade in the ratings of the instruments and a rise in their yields as prices dip.
The Naira currently exchanges for not less than N315 to a dollar officially and about N350 in the parallel market. Therefore, it is doubtful that banks have the capacity to take on further foreign debt exposure.
”Who will buy the initial public offerings? Even private placements are not guaranteed in an economy like ours currently”, a former managing director of a stock broking firm who refused to have his name mentioned in print said.
Unfortunately, all the Nigerian banks have suffered rating downgrades. The implication is that their credit ratingsare no longer impressive and the cost of raising funds has rallied up a couple of notches.

”This is not the best of times to be hooked to a bank management seat, your butt could get seriously heated by poor quality loans, tightened liquidity and equity capital that shrinks before your very eyes like Alice in Wonderland. I certainly don’t envy local bank ceo’s, they are a specie of Homo sapiens with dangerous lifespans”,

said Teslim Shitta-Bey, a Lagos based financial analyst.
Unfortunately, some of the banks are in dire need of capital to shore up their capital adequacy ratio. It is also clear that some of them which have indicated interest to raise additional funds to maintain reasonable stature around the prudential requirement.
The banks are therefore, wary that any fresh equity offerings brought to the market may not be fully subscribed. They have cautioned themselves after making public statements that they were coming to the capital market to raise funds.
Deposit Money Banks now pretend to prefer debt financing to equity financing. But it is obvious ,industry watcher’s have noted, that the capital market can hardly favour any capital raising as investors are still not impressed with the persistent low activities. Shareholders at Access Bank 2015 Annual General Meeting held in 2016, advised the Bank to raise the N100billion fresh capital it seeks through debt financing instead of equities.
Aside fears that equities financing would increase the banks share capital, they believe the market was not in the right frame and buoyant enough to adequately aid the decision. In fact, nothing appears to be happening to propel the market strongly Northward and attract investors.
”Go for bond. Do not touch equities financing with a long spoon”, said President Progressive Shareholders Association of Nigeria (PSAN)
Interestingly, IPOs were very common in 2007 and 2008 before the market witnessed a downturn. Since 2008, companies have been avoiding IPOs, embracing mostly rights issues and bonds. But that seems to have changed because in the last few years it has been difficult to pull through any of thus.
Access bank had in 2015 raised N41.8 billion through the offer of 7.63 billion ordinary shares of 50 kobo each at N6.90 to its shareholders at the ratio of one new share for every three previously held.
The offer opened on January 26, 2015 and closed on March 18, 2015.

Capital market Business Hallmark  Monday,August 1 , Nigerian Banks under perform
Only Seplat Petroleum Development Company Plc and Transcorp Hotels Plc had made IPOs in 2014. While Seplat, which was a global IPO, was 100 per cent successful, that of Transcorp Hotels Plc recorded 50 per cent subscription.
According to FBN Capital Limited, the investment arm of FBN Holdings Plc, in 2014, Nigerian banks issued Eurobonds running into over $2bn, aside other dollar-denominated foreign loans, more than the $2bn they raised in 2013.

Capital market Business Hallmark  Monday,August 1 a
Hopes that the capital market would be revived and IPO’s would begin to thrive again after the Presidential elections of 2015 were dashed, when the economy began to drift without any clear vision or road map.
Foreign investors who have dominated investments in the capital market by about 60 per cent are still on the edge since they left. They appear to have refused to return as they finger Nigeria’s economic management as lacking transparency.

Capital market Business Hallmark  Monday,August 1
However, a few rights issues have helped some companies to raise capital. But there is deep fear that this may not be able to continue given the severe illiquidity in the economy. After all, the Central Bank of Nigeria a few days ago raised Monetary Policy Rates from 12 per cent to 14. ”This is further tightening of the economy that is in a depression and does not help”, many industry analysts have said.
At the end, both parties expressed the desire for the capital market to play a deeper role in funding gaps in the federal budget as well as to mobilize institutional funding for infrastructure development.
Analysts reckon that the only alternative the banks have to raise fresh capital currently is through debt financing.
David Adonri, Managing Director of Highcap securities limited, believes that that the capital market is depressed and can not provide succour to any company, not only the banks that want to raise funds through equities.
”The primary market is not active to support any IPO or public offering now”,  Adonri said the problem with the banks is not the ability to raise funds. It is the misapplication of the funds.

”Investors view the banks with suspicion because of their propensity to engage in malpractices. They don’t have confidence in them. In some developed economies, any culpable person in terms of malpractices go to jail, but the case is different in Nigeria. Look at the over N5trillion debt that AMCON (Nigeria) is shouldering. Those responsible for that problem are still free today. So this is why the level of confidence in Nigerian banks is very low”,

Adonri added.