Nigerian banks FBN Holdings PLC, United Bank for Africa PLC and Zenith Bank PLC will each need to expand their loan books by the equivalent of about $1 billion — at today's exchange rate — in order to avoid heavy penalties the country's regulators are looking to implement, according to S&P Global Market Intelligence calculations.
Following an oil price slump in 2014 and the ensuing recession and currency crisis, the country's banks have been wary of extending loans to the real economy, preferring to tie their money up in safer treasury bonds.
To deter this practice and ramp up growth, the central bank said July 3 that banks would need to maintain a loan-to-deposit ratio of 60% by the end of September, and that those failing to do so would face "a levy of additional cash reserve requirement equal to 50% of the lending shortfall of the target [ratio]."
Central bank Governor Godwin Emefiele has also said banks' minimum capital bases are now insufficient because of the sustained slump in the value of the oil-dependent nation's currency, the naira.
Incentive to lend
FBN, United Bank for Africa and Zenith Bank all had a loan-to-deposit ratio lower than 60% in the first quarter of 2019, along with fellow Nigerian lenders Union Bank of Nigeria PLC, Guaranty Trust Bank PLC, Jaiz Bank PLC and Unity Bank PLC. FBN's ratio stood at 47.59%, United Bank for Africa's at 47.85% and Zenith's at 50.18%.
FBN would need to extend an additional 436.16 billion naira in loans to meet the target, or about $1.20 billion, S&P Global Market Intelligence research shows. United Bank for Africa would need to lend 428.87 billion naira and Zenith Bank 350.55 billion naira; the others would need to lend between 20.99 billion naira and 164.78 billion naira each.
The central bank's move to force banks to lend more is "significant because over the past two years we've seen banks develop apathy in terms of credit creation, which has hampered domestic economic growth," said Jerry Nnebue, an equities analyst at CardinalStone, an asset management firm in Nigeria's commercial capital Lagos.
"Banks have tended to overly concentrate their liquid assets in money markets and treasuries, so the central bank is trying to force banks to lend more to the real economy in order to accelerate growth."
This "rush" to expand lending just to meet regulatory requirement may increase banks' nonperforming loans because of the fragility of the economy, said Ayodele Akinwunmi, head of research at FSDH Merchant Bank in Lagos.
"Banks may sell down some of their fixed income securities in order to meet new loan requirement. This may increase the yields on the fixed income securities while the prices drop."
Higher capital requirements
CardinalStone's Nnebue also said raising minimum capital requirements for banks makes sense given that efforts to increase loan-to-deposit ratios "could drag some banks on the capital adequacy front."
Emefiele told local media in June that banks' minimum capital bases were insufficient due to the sustained slump in the value of the Nigerian naira since the last increase in capital requirements in 2005. It has fallen to 364 naira to the dollar as of Aug. 20, 2019, from 138 naira in August 2005. According to local newspaper Vanguard, new capital base requirements for national banks and those with international licences could increase to 57 billion naira and 230 billion naira, respectively.
"This is an essential step — compared with the large banks in South Africa and Morocco, for example, Nigerian banks' capital base is smaller," said Samira Mensah, director of EMEA financial services ratings at S&P Global Ratings.
"Nigerian banks also operate in very risky environments, so that requires bigger capital buffers to protect lenders against economic volatility and credit losses. It's the price of doing business in Nigeria and other high-risk economies."
Ayodele Akinwunmi, head of research at FSDH Merchant Bank in Lagos, said the planned capital increase was motivated by a desire to ensure that credit flows through the economy more easily. GDP will expand about 2% this year, S&P Global Ratings forecasts.
Higher capital bases could cause banks' return on equity to decline, at least initially, he said. But this will improve as the new capital is deployed to generate additional income.
Midtier Nigerian banks with an international license that might undershoot the potential new capital requirements could switch to a national one should they struggle to increase their capital.
"The banks will have that flexibility," said Mensah. He said capital markets currently have not been especially conducive to holding rights issues, but that this could change following February's presidential election and central bank moves to end a foreign exchange shortage.
"Nigeria's top-tier banks have a fairly stable and diversified shareholding structure so they should be able to increase their capital base if need be."
The previous capital base increase in 2005 spurred widespread consolidation and the closure of around a dozen insolvent banks, with the number of banks eventually falling to 25 from 89 as additional reforms in 2010 hastened sector consolidation. Further consolidation is ongoing, with Access Bank PLC recently taking over peer Diamond Bank PLC to create Africa's largest bank by customers.
"The banks who don't meet the new requirements will probably go the capital markets to raise funds or do a rights issue," Nnebue said.
He highlighted recent rights issues by telecom duo MTN Nigeria and Airtel Africa.
"We'll also probably see some banks merge," he said. "Banks that are unwilling to go to the market will likely reduce dividend payouts to bolster their capital base."
As of Aug. 21, US$1 was equivalent to 363.96 Nigerian naira.