New Round Of Consolidation Seen In Banks Post 2016 | Independent Newspapers Limited
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New Round Of Consolidation Seen In Banks Post 2016

Posted: Jun 8, 2016 at 4:30 am   /   by   /   comments (0)

Slow Economic Growth, Poor Liquidity As Catalysts

A new round of consolidation is being projected for the banking sector post 2016, even at a lesser degree than the 2008 wave, which saw reduction in number of banks from 89 to 25, according to analysts at BMI Research, a subsidiary of the Fitch Company.

In its monthly Africa Monitor Newsletter for May 2016, BMI says the impending consolidation would be driven mainly by the slowing economy and liquidity drought in the financial services industry.

“A crisis like that of 2008 is unlikely, but there will be consolidation as banks come under pressure”, the newsletter stated, adding that there are already three candidates for takeover in the sector as they have been ordered by the Central Bank of Nigeria (CBN) last November to recapitalise before this June after failing a stress test to reach a minimum capital adequacy of 10 percent.

Though CBN failed to mention the names of the banks, the likely candidates for merger, acquisition and or takeover are said to be currently operating regional and national licences with respective capital bases of N10 billion (USD50 million) and N25 billion (USD125 million).

Describing the situation as an opportunity, BMI says the pressure to recapitalise for some banks would lead to “opportunities to make acquisitions”.

The newsletter specifically made references to Abubakar Suleiman, Sterling Bank’s CFO, who was quoted as saying that his bank was looking to buy one or two mid-sized commercial lenders in a consolidation bid.

BMI’s conclusion as to the trajectory of the Nigerian banking market, it says is hinged on the collapse in growth in the Nigerian banking sector at the close of 2015 making it to “anticipate much more sluggish growth this year than we did previously”,

The report points at deteriorating bank assets; drop in loan portfolios, the battered macroeconomic environment, fall outs of the single treasury accounts (TSA) and banks’ performance on the Nigerian Stock Exchange (NSE) as factors that would coalesce into the projected consolidation.

“Over the eight months to August 2015, y-o-y growth in total Nigerian banking sector assets averaged 14.4%. However, the last four months of the year saw asset growth fall to 2.3% y-o-y in December.

“A similar story played out in client loans, which averaged 14.7% from January to August, but fell to 2.7% y-o-y in December,” according to the report.

The analyst’s bearish stance on the sector, which is heavily exposed to the oil sector, was exacerbated by “collapse in Brent crude”, which drew average forecast for 2016 at USD40 per barrel (/bbl) compared to a previous projection of USD56/ bbl.

Equally, “The CBN’s highly unorthodox monetary policy measures, including the refusal to devalue the naira, which have hit productivity and investor sentiment,” was cited as base assumptions for their projection.

“The sudden drop-off in banking sector growth over the last four months of 2015 is likely a result of these measures which have served to reduce liquidity in the (banking sector).

“Another factor will be the introduction of the new Treasury Single Account, implemented by President (Muhammadu) Buhari in a bid to improve accountability and to reduce leakage from government accounts. The immediate effect of its implementation on September 15 was to paralyse the interbank market as liquidity fell”.

BMI says the poor outlook for banks is illustrated by the poor performance of the Nigeria All-Share Index.

However, Matthew Ogagavworia, a financial expert and stockbroker, says he does not see local banks on their own going into voluntary mergers because an average Nigerian business man will want to do it on its own, even though it makes sense to form alliances and partnerships.

“But they may be compelled by market exigencies to form partnership if the current operating economics of scales do not suggest that they continue to operate on their own. Particularly if they start facing regulatory measures to meet minimum capital requirements that may be impacted by Nigeria’s current economic position where income that banks hitherto earned have shrunk, businesses that banks usually make money from are disappearing from the system and then government is coming more to extract from businesses. If it is not regulatory driven, you will see most banks struggling on their own,” he said.

“By third quarter this year, you will see that banks’ balance sheets will begin to suffer strain and in this scenario, regulatory agencies will then put them under pressure to keep partnership and then that forecast will come to pass. But when there is no regulatory pressure, they will still want to do it alone and have banks that are not healthy but sickly.

“If you observed in recent times, most of them have taken to raising capital but none of them have been able to raise a successful public offer. The highest they have done so far is debt. I was even told that there are lots of debts that are currently hanging on Discos and Gencos that banks have financed heavily,” he noted.

John Chukwu, Managing Director, Cowry Assets Management Limited, said it would be too early for anybody to begin to speculate that there will be consolidation in the sector.

“I think banks for now are relatively big and I have not seen the moves towards consolidation. The challenge that the industry is going through is an industry problem and consolidation could only occur if you are saying some are not affected. If you ask me, I will say that the banks will rise through the problem they are currently facing. By the time the economy adjusts properly we may have foreign banks that may want to buy into Nigerian banks.

“We know Keystone Bank is on the block for sale and obviously one of Nigerian banks may acquire it. You cannot call that an industry-wide consolidation. If two banks that have poor liquidity problem merge they will still have liquidity problem,” he said.

According to BMI report, there are 21 banks on the index, with a weighting of 22%, and their 15% decline year-to-date is contributing to their poor performance. Equally, the banks’ exposure to the other poorly performing firms on the index will further impact their performance – the large weighting of oil firms on banks’ loan books will be a particular concern. For the three largest banks in Nigeria – FirstBank, Guaranty Trust Bank and Zenith Bank – loans to the oil sector account for around 40%, 36% and 20% of their loan book.

On a more positive note, the report says the surprise 200 basis points (bps) cut in the key policy rate by the CBN in November 2015, which was equally maintained in May might encourage some banks to increase lending. The CBN has called for ‘moral suasion’ for the banks to increase lending to small- and medium-sized enterprises, and “we maintain our view that the sector as a whole will not undergo the same level of distress as seen in the banking sector crisis of 2008-2011.”

A series of measures introduced by the CBN in the wake of this crisis means that lending institutions are in a far stronger position to weather the storm than previously.