By Peter Egwuatu & Ediri Ejoh
THREE banks have to raise additional funds in 2016/17 financial year in order to meet and sustain their Capital Adequacy Ratio, CAR, which has come under pressure. This follows the devaluation of the Naira and a nominal expansion in risk weighted assets due to significant foreign currency exposure.
Afrinvest West Africa limited stated these in its 2016 banking report launched last week. It also revealed that more banks are planning to retrench staff and cut Operating Expenses, OPEX, as drop in interest income are likely to affect the banks’ profitability.
The report stated: “The pace of interest income growth will soften on account of credit tenor and obligation restructuring amidst rising non performing loans, NPLs and weaker risk asset growth. “Nominal expansion in loan book may not translate into an increase in interest income given that recessionary pressure in the economy as well as cash flow constraints may increase default risk in the system while trading income is expected to remain depressed despite the recent reforms in the inter-bank foreign exchange market as liquidity remains a major challenge.”
Continuing, the report said, “In contrast to the above, we expect non-interest income to increase due to foreign exchange foreign exchange gains from naira devaluation and given the recent increase in Monetary Policy Rate, MPR, the yield environment has become quite attractive. Increased deployment of funds to investment securities which started since 2015 will likely continue until the structural and macroeconomic concerns in the country are allayed. More so, upward review of Monetary Policy Rate implies a higher rate on loans and improved yields on fixed income securities which in turn will increase the overall rates on interest yielding assets.” It further said: “We expect banks to make further cut back on operating expenses”.
Profit, capital point downwards
The Afrinvest report also said that banks’ profits would be reduced in 2016, despite cut backs in operating expenses. “Lower gross earnings due to weaker interest income and strains on non-interest income despite rising impairment charges will pressure margins. Hence, Profit Before Tax (PBT) and Profit After Tax (PAT) margins are expected to soften.”
According to the report, “CAR, is expected to come under intense pressure in 2016 following the devaluation of the Naira and a nominal expansion in risk weighted assets due to significant foreign currency exposure. Our analysis suggests a 2.2 per cent average decline in industry CAR in 2016 for all the listed banks under our coverage. However, majority of the banks (except for SKYE) appear well capitalised to withstand the pressure given the stringent regulatory guidelines. We suspect the possibility of SKYE, DIAMOND and FBNH raising capital in 2016/17 as their current CAR levels remain close to regulatory threshold.”
The report also stated that there is not likely going to be mergers and acquisitions (M&A) in the banking industry due to capital adequacy threats. “We do not foresee much M&A transactions in 2016/17 given the size of banks now relative to pre-2005 consolidation. In our opinion, most of the banks are adequately capitalised to withstand the pressure in the horizon. Accordingly, we think the possibility of M&A amongst the 15 listed banks is slim. Nevertheless, we may not rule out the likelihood of M&A with the indigenous private unlisted banks and Keystone Bank (which is currently being offered for sale by AMCON).”
Nigeria’s investment case shifts
In the report, Afrinvest while proffering solutions to the economic downturn of the nation stated that with the economy underperforming its potential, the oft-repeated investment case for Nigeria has shifted from the resilient economy with unexploited natural and human resources, attractive demographic features and high profit margins to confidence metrics such as, policy consistency, sound governance, regulation and reforms.
It said: “Despite recent reforms in the oil and gas and foreign exchange markets, key macroeconomic indicators – galloping inflation, GDP, exchange rate depreciation and fast rising unemployment rate – have deteriorated with no sign of a reversal in the horizon. In addition, weaker assets prices with no buyers in sight aptly captures the degree of pessimism in the Nigerian economy and markets by investors, producers and consumers.”
It added that “restoring confidence in regulation, policies, markets and governance appears to be the single most important factor required to rekindle investors’ interest in the Nigerian economy and financial markets. We are of the view that rebuilding confidence in the Nigerian markets would require broad-based policy measures encompassing fiscal and monetary policy as well as further structural reforms.
”We think there is an urgent requirement for the economic managers to re-organise recent policy actions to ensure both fiscal and monetary policies are in harmony. More importantly, efforts must be put in place to ensure policy actions are prudent, predictable and consistent going forward.
“In addition, we recommend a complete liberalisation of the foreign exchange market, devoid of any suspected invisible control of the CBN. Having delayed adjustment to a flexible foreign exchange framework, the CBN needs to consciously ensure regulatory consistency and stay the course of its new framework to regain lost credibility and boost confidence among investors.
”The huge spread between the official and parallel market rates is a source of concern and continues to form the basis upon which most foreign investors perceive the true value of the naira. We think that after over one year of excluding 41 items from accessing forex from the inter-bank window, the fiscal authorities should have either banned or increased duties on these items by now.
This would remove one of the major factors driving the parallel exchange rate lower and leading expectations of lower exchange rate at the official market. Resolving the foreign exchange dilemma and giving up restrictions would enable the CBN regain control of monetary policy and focus on reducing interest rates from the current high levels stifling credit access.
Diversifying the economy
”Beyond embracing reforms to reduce recurrent expenditure and engender probity in public sector finances at all levels, we believe the fiscal authorities can still do more in building fiscal resilience through diversifying revenue base. Although higher taxes could be a drag on growth in a period of recession, it could also reduce the credit risk of the Sovereign and unlock borrowing potentials required to invest in infrastructure and buoy growth.
Hence, underexplored tax potentials, especially relating to consumption may need to be reviewed. Nonetheless, tax breaks and holidays should be given to high employment sectors such as agriculture, tourism and real estate to spur private sector investment”.
Afrinvest further said that oil prices and production volume remain indirect nominal anchors of foreign capital inflows into Nigeria.
The report stated: “With the protracted crisis in the currency market, we think it is pertinent for the Federal Government to urgently find a long lasting solution to the lingering crisis in the Niger-Delta region in view of developments in the global oil market. Perhaps adopting a more diplomatic approach rather than force may save the economy a few more barrels of crude while still keeping dialogue open.
“Beyond recent efforts to restructure the NNPC for efficiency and the partial deregulation of the downstream oil and gas, we reiterate our advocacy for a comprehensive reform of the oil industry and privatisation of the NNPC. This will go a long way towards nipping the recurring militancy issue in the bud while immediately unlocking latent value to the Government in new revenue opportunities.
“Meanwhile, we strongly believe Nigeria should put forward a stronger case against OPEC’s current strategy on crude oil production while pressing the cartel further for supply cuts to strengthen oil prices in the global market. This would have a positive impact on GDP figures, fiscal revenues, foreign exchange earnings and power supply.
According to the report “Current trade policies of the federal government and foreign exchange policy of the CBN suggest a policy environment focused on import substitution (and demand management) as opposed to export-led growth. We think less emphasis needs to be placed on import substitution as a strategy but propping non-oil export industries via promotional campaigns and infrastructure support programmes.
”The need to improve infrastructure stock of the country was captured in the 2016 budget with more allocations going to capital projects. Yet, we think infrastructure spending needs to be more strategic with an overarching focus to promote agriculture, industry and services.
Perhaps, a plan stating the economic vision of the administration and the action plans to ease the difficult conditions of doing business in Nigeria will better communicate government’s strategy. Government should embark on a comprehensive re-organisation of the agricultural industry, increase investment in processing and storage plants and also drive expansion in exports in a bid to expand source of foreign exchange earnings”.
Assessment of ‘Change’ slogan
“Indeed, with the first anniversary of the appointment of the current cabinet fast approaching, it may be useful to undertake a broad assessment of the performance of government at the institutional level, as well as a more detailed evaluation of the performance of ministers as individuals. Whilst it is impossible to retroactively establish metrics and benchmarks for such evaluations, it may however be necessary in order to truly demonstrate a divergence from the status-quo (change!), while communicating the message that poor performance will also be rewarded”.
It said “Rather than spend energy launching social programmes, the government urgently needs to commission a team of experts to lay out a comprehensive economic blueprint for Nigeria within weeks. This should be complemented by appointing a handful of individuals that have proven experience and credentials to implement such a plan. President Buhari must then throw the full weight of his authority behind such individuals to enable them proactively take the necessary critical steps required to stem the current economic hemorrhage and reset Nigeria towards the path to growth.
Recent evidence from the currency market shows that the economy has suffered gravely from the feedback effect of reactionary and hesitant policy responses where the delayed decision to adopt a flexible exchange rate weakened investment confidence and deteriorated key macroeconomic variables.
Thus, to restore confidence in the system, the new economic team must have the capacity to advocate for pre-emptive and timely policy measures and insist on the proper co-ordination and alignment of such policies amongst both fiscal and monetary authorities”.
Incoherent policy, leadership, others, fuel economic crisis
Speakers at the panel session identified incoherent policy, leadership and others as major challenges that continue to cripple investment as well as preventing foreign investors from coming into the country.
In this connection, one of the members of the panel, CEO of Economic Associates, Dr. Ayo Teriba, called on the Federal Government to put in place a clear roadmap for the country’s economy.
According to him, “placing different set of rules between foreign investment and local investment is a wrong signal to economy development for the country.
“We are currently hit with economic crisis because of dependence on two volatile economic components – export and investor base.
“We must learn from India that relies heavily on Diaspora remittances, which are directly invested on sovereign assets, thus providing needed foreign exchange. We must broaden the focus, not only on foreign investors, but also with confidence building policies, to attract the Diaspora”.
“However, the country had been obsessed with export and portfolio investment which are very volatile. The issue is more of access than confidence. We should be looking into other areas like diaspora investment remittances, and building greenfield foreign direct investment.
“The focus point is for the country to deal with the foreign exchange, forex and develop the decayed infrastructure.”
Another member of the panel, Professor Pat Utomi, called for structured leadership in the country, adding that such is the benchmark for a thriving economy away from current recession. “We need to deal with leadership challenge in the country as well as striving to build robust policies on investment that will entice both domestic and foreign investors. The environment must be right for investors to invest in the country”.
Chairman, First Bank of Nigeria Ltd, Mrs Ibukun Awosika, who was also on the panel, frowns at the current state of investments in the country. She argued that critical evaluation of investors coming into the country should be of paramount importance.
“There is need for critical evaluation of investors coming into the country. However, the body language of the federal government should be channelled to becoming investor friendly. Information coming from the Ministers are not coherently in sync for development, and as such sending a negative signal to investors.
“We need to be decisive. This means that decisions that are structured towards reforms and more, are key to building investors’ confidence in the economy.
Also, we must focus more on local investors who would reinvest the money within”.
On his part, Executive Director/Chief Financial Officer, Sterling Bank Plc, Mr Sulaiman Abubakar, also on the panel, believes the country must be ready to tell a national story of its economy.
He stressed: “we must teach the story to children at all levels, everyone must embrace it and tell it the same way”.