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Us Dollars... Greater Chunk of the Capital Being Raised Are Dollar-Denominated

September 1, 2014

A combination of the regulatory directive on the implementation of a new regime of risk management in banks and the corresponding rise in the appetite of critical sectors for financing may have sustained the ongoing rush for new capital by banks, reports Festus Akanbi.

Indications emerged last week that the intensity of capital raising by Nigerian banks may not simmer till the end of the year as money deposit banks move to consolidate on their sphere of influence in the emerging banking landscape in the country. The CBN issued a circular in January 2014 mandating banks to implement the Basel II and Basel III guidelines for risk management with the minimum capital adequacy ratio (CAR) computation under Basel II rules to commence fully in June 2014. The CBN's regulatory minimum CAR is 10 per cent for local banks and 15 per cent for banks with international operations, above the Basel recommended minimum of eight per cent. Basel II was initially published in June 2004 to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the various risks the banks expose themselves to. On the other hand, Basel III, a response to the 2008-2010 banking crisis, strengthens bank capital requirements on liquidity and leverage. It ensures that banks have core capital, different from other types of capital, such as hybrid capital, as obtained in developed economies. "Basel II and III requirements by the regulators is an alignment of Nigerian banks with the international sector," said Samira Mensah, associate director, financial institutions ratings at Standard & Poor's. "Basel II and III requirements by the regulator is an alignment of Nigerian banks with the international sector," said, Associate Director, Financial Institutions Ratings at Standard & Poor's, Samira Mensah.

Rising to the occasion Feelers from some of the banks have shown that apart from the quest to meet the regulator's directive on capital adequacy, the sustained appetite for new capital by banks appeared to have been largely driven by the need to respond to the rising need for the corresponding rise in appetite for facility by critical sectors of the economy including power, and the real sectors. One of such banks is Union Bank of Nigeria Plc, which received the nod of its shareholders to raise about $750 million (N120 billion) capital few months back. The shareholders gave the approval at the 45th annual general meeting (AGM) of the bank, earlier in the year in Lagos. The directors had asked the shareholders, among other things, for their authority "to take all necessary steps to raise medium-term funding by the issuance of debt instruments(s), tenured bond(s) and/or tier 2 securities or a combination of these financing options, up to a maximum of $750million or its equivalent in any currency or such terms as may be determined by the board." The Chairman of Union Bank, Udoma Udo Udoma, said the fresh capital would facilitate the execution of the bank's new strategies. However, industry watchers wondered that months after it received the endorsement of the shareholders, the bank is yet to start the capital raising. Responding to enquiries during the visit of representatives of the bank to the headquarters of THISDAY Newspapers last week, Union Bank's Head of Corporate Affairs and Corporate Communications, Ogochukwu Ekezie-Ekaidem, explained that it wasn't as if the bank desperately needed the fund as at the time its management sought the nod of the shareholders, saying that the action was aimed at pre-empting developments in the banking industry. According to her, Union Bank hopes to participate actively in corporate finance and in retail segment, adding that it was in anticipation of this big role that the bank decided to go for more capital. Analysts said the trend is the same in virtually other banks.

Harvests of capital In April this year, Zenith Bank Plc joined the league of Nigerian banks that have successfully raised funds from the Eurobond market. The bank issued a $500 million five-year senior unsecured Eurobond with a coupon of 6.25 per cent. The offer was over-subscribed, with United States, United Kingdom and European investors accounting for 44 per cent, 35 per cent and nine per cent of the allocation respectively. A breakdown of those that subscribed to the fixed income instrument showed that fund managers dominated as they got 74 per cent of the subscription, followed by banks and private banks (15 per cent), hedge funds (nine per cent), and insurance and pension funds firms (two per cent). Interestingly, Nigerian entities only represented six per cent of the allocation, which is low compared to previous Nigerian corporates' Eurobond issuances. Information supplied by Sterling Bank showed that in 2013, the bank raised $80 million (N12.9billion) through a Rights Issue to existing shareholders. It enjoyed a 103.3 percent subscription. The bank, according to an official, is currently working on a $120 million (about N19.2billion) Private Placement. "We hope to conclude this by October 2014," the official said, adding that a multi-currency debt issue in the sum of $200 million is also on the cards as part of our overall capital raising programme. He said the capital raising programme is designed to fund the Bank's growth plans. It was also this year that FBN Holdings Plc announced that its largest subsidiary, First Bank of Nigeria Ltd, has priced a US$450million subordinated Tier2 debt issuance in the international markets. The proceeds from the capital raising, according to the bank, will be used by First Bank for general banking purposes. A statement from the bank said: "In line with the capital management strategy, First Bank has chosen this route to support its business initiatives in the near term, further diversify and extend the maturity of the bank's foreign currency funding and ensure that it remains well capitalised with a capital adequacy ratio (CAR) of 16.31 per cent as at the end of March 2014. In August last year, an amount of US$300 million Tier 2 capital with a coupon rate of 8.250 per cent was raised and is currently still outstanding. Ecobank Nigeria Plc, on its own, is considering raising additional capital in order to boost its tier-1 capital. The subsidiary of Ecobank Transnational Incorporated (ETI) recently raised $250 million in tier-2 capital, thereby lifting its capital adequacy ratio (CAR) to 16.5 per cent. However, under Basel II and III, the bank's CAR dropped to 14.5 per cent, further highlighting the need for more capital to support growth. Ecobank Nigeria's total capital adequacy ratio at the end of the first half of 2014 stood at 13.3 per cent, which most analysts viewed as light given the bank's scale and recent categorisation as a systemically important bank by the Central Bank of Nigeria (CBN) draft guidelines. "Considering the CBN's preference for tier-1 capital for a bank of this scale, we think the subsidiary needs a tier-1 capital injection," Banking Analyst at Renaissance Capital, Adesoji Solanke, said. Skye Bank Plc has raised a total of $150 million tier II capital as part of measures to beef up its equity and working capital. Group Managing Director/Chief Executive Officer of the bank, Timothy Oguntayo, said the capital raising exercise was in tandem with the approval of the shareholders at the last annual general meeting, adding that the new capital would strengthen the bank as a solid institution.

Intervention in Critical Sectors The Skye Bank boss said the bank would use its enhanced strength to further intervene in funding critical sectors of the economy to bring about national development. Specifically, he said the bank had been supporting the oil and gas industry, real estate development, agriculture, educational institutions, among others. First City Monument Bank (FCMB) planned to raise about $300 million this year to boost consumer lending. FCMB may consider issuing Eurobonds if market conditions are favourable, the bank's Chief Executive Officer, Mr. Ladi Balogun, informed Bloomberg. "Our preferred source of funding has been the loan markets as opposed to bond markets due to more stable pricing," he said. "We will probably get to about 40 per cent of our loan book being personal lending." The CEO said FCMB plans to increase its loan book by about 20 per cent to N540 billion ($3.3 billion) this year, as it joins other Nigerian lenders in raising debt to boost credit to consumers and fund infrastructure in Africa's largest economy. In April, shareholders of Diamond Bank Plc endorsed the plan by the bank to raise $500 million additional capital in its quest to raise its tier 2 capital by $750 million. The fund would be raised through a rights issue in the ratio, terms, conditions and dates to be determined by the directors, subject to regulatory approvals. The bank explained that it had already raised about $250 million out of $750 million. Speaking at bank's 23rd Annual General Meeting (AGM) in Lagos, its Group Managing Director/Chief Executive Officer, and Dr. Alex Otti, said the fund would enhance Diamond Bank's operations as well as its expansion drive. He explained: "The capital raising is actually part of the $750 million we wanted to raise earlier. It is not that we are looking for $750 million; we already have close to $250 million. "So what we are looking for is around $500 million and I don't think shareholders have anything to worry about because we really took our time and went through the process. I assure you (shareholders) that it is going to make the bank better, rather than dilute your shares."

Trigger for Capital Raising Managing Director, Africa Macro/ Global Research, at Standard Chartered Bank, UK, Razia Khan, who has been tracking the developments of the Nigerian banking sector, said the recent review of the mode in which banks' regulatory capital is computed would lead to an increase in the number of banks embarking on capital raising. According to Khan, "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 USD funding. More FX-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." Analysts believed that because the dummies of the new capital raising were being sold to shareholders at the annual general meetings of some of the banks, it was easy for the local investors to buy into the new capital raising arrangements. A leading shareholder activist, and President, Association for the Advancement of the Rights of Nigerian Shareholders, Dr Farouk Umar, said the shareholders would support capital raising exercises in banks.

Shareholders Hopeful Reacting to the capital raising exercise embarked upon by Sterling Bank Plc recently, Umar said the bank needed to increase its share capital to finance value creation projects. He also said enhanced shareholders' funds would increase the bank's lending limits. National Coordinator, Independent Shareholders Association of Nigeria (ISAN) Sunny Nwosu, said the capital exercise would improve the bank's return on investment. Nwosu said the bank would not be able to finance big business with a small capital base. "If our capital base is not robust, we will not be able to finance big businesses. "ISAN support for the bank's robust financial muscle stems also from the need for Sterling Bank to be repositioned toward benefiting from the anticipated business of government's transformation agenda," he said.

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Source: AllAfrica

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