The broad effects of low oil prices
and production disruptions, which have resulted in a significant
reduction of foreign exchange earnings, have raised concerns about some
banks’ ability to honour their Eurobond obligations upon maturity.
Some of the offshore funds that were
raised by the banks to expand operations and finance foreign currency
infrastructure projects would mature between 2017 and 2021.
For instance, Access Bank will have to
raise $350 million for its maturing Eurobond due in July 2017; Fidelity
Bank’s $300 million Eurobond would be due by May 2018; Guaranty Trust
Bank’s $400 million will be due in May 2018; Zenith Bank has an
outstanding debt obligation of $500 million; Diamond Bank also has a
$200 million Eurobond; while First Bank of Nigeria Ltd has two Eurobonds
– $300 million and $400 million – maturing in 2020 and 2021.
All the Eurobonds issued by the banks
with different coupon rates that must be paid annually before maturity,
are also callable before maturity.
Afrinvest West Africa Limited highlighted this in its 2016 “Nigerian Banking Sector Report” launched last week.
The high cost of raising capital from
the domestic market was one of the factors that drove the banks and
other corporates to the international debt market.
The Nigerian economy is in recession
with external reserves falling to $24.743 billion as of last Thursday.
Since the Central Bank of Nigeria (CBN) introduced a flexible exchange
rate regime to allow the currency to trade freely on the interbank forex
market, dollar liquidity has remained a challenge.
Owing to this, the central bank has
remained the major supplier of FX in the market. The naira closed at
N440 to the dollar on the parallel market last Friday, while on the
interbank FX market the spot rate of the naira closed at N307.79 to the
dollar.
“With the scarcity of FX in the
market, you shouldn’t forget that a number of banks have Eurobond
exposure. There are more than $2 billion maturing Eurobond obligations
within the next few years. If we don’t find ways to allow more dollars
into the system, this could be a potential problem to watch out for as
they mature,” the Managing Director of Lagos-based Afrinvest West Africa
Limited Ike Chioke said in the report.
Furthermore, the report stated that
oil and gas loans may also pose a challenge for Nigerian banks in 2016,
based on developments in the economy, followed by general consumer goods
and then manufacturing.
“Power is a perennial one since the
power sector privatisation. That is because we have many of these assets
which only earn naira revenue, but were sold in dollars.
“So, many banks still have many
challenges restructuring those facilities because of the massive
devaluation and the effect on the balance sheet,” Chioke added.
However, the report showed that the
Nigerian banking industry remained liquid, with many of the commercial
banks reporting very strong liquidity ratios based on their 2015 audited
accounts.
From a valuation perspective, the
report stated that all the issues facing the economy had turned out to
be challenging for the banks, adding that they are relatively
undervalued compared to sub-Saharan African banks from a
price-to-earnings perspective.
According to the report, from the
composition of risk assets, banks’ 2015 audited results showed that an
average of about 35 per cent among the Tier I banks, their risk assets
were denominated in foreign currency.
“As you translate this on to the
balance sheet, because of the exchange rate devaluation, it would have
an impact on their capital adequacy ratios. We are projecting NPLs could
get to 12 per cent by the end of the year. Clearly, there are lots of
concerns for the industry,” the Afrinvest boss said.
He noted that the drop in crude oil
prices exposed the underbelly of the Nigerian economy, adding that
immediately the oil tap stopped flowing, everybody in Abuja began to pay
attention to words such as reforms and economic restructuring.
“This also affected the country’s
current account balance such that quarter-on-quarter, the country was in
deficit, trying to find ways to fund the perennial appetite of its
citizens importing basically everything it needs, from toothpicks, ice
cream, human hair, etc.
“But there were other shocks that we
caused ourselves. Knowing that our income had declined, we didn’t take
appropriate defensive action to correct the dwindling of our external
reserves. It took us until May 2016, to actually effect a proper
devaluation of the currency and by that time, we had lost close to half
of our external reserves.
“So, that was a self-induced problem
and we could have addressed that. That delay in devaluation was really
not a good one for the economy.
“Well, we did manage to reform the
fuel pricing even though it was a bit late and the current structure is
still unstable. We have managed to divert a portion of export proceeds
that come from the international oil to fund the oil marketers who then
import fuel for us.
“But going full and implementing
something that allows us to build our refineries and be able to have
petroleum products locally would save us between 30 and 40 per cent of
the FX we spend in importing fuel.
“Another shock was the Treasury Single
Account (TSA) implementation. In an environment where you know your
income is much reduced and you are trying to deficit finance yourself,
you are mopping up the liquidity in the banking system.
“You find out that liquidity is a
bigger driver in the system than interest rate. So, by mopping up all
the liquidity in a very tough market, you actually frustrate many of the
banks from lending.
“Today, the fundamentals of the
country are not as strong as they used to be, and we can see that from
our ratings downgrade. This obviously doesn’t help us when we want to go
abroad to raise capital to fund our deficit as we plan to do this
year,” the report said.
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