Nigerian banks raise $1.7 billion Eurobonds in 12 months
Nigerian banks have in the last 12 months raised US$1.7 billion in Eurobonds from the international capital markets, as they seek to boost their capital in the face of a more difficult operating environment in the country.
The rush for Eurobonds is boosting the capital position of the banks as well as their dollar liquidity, following the difficulties experienced in 2016 by most banks, in opening new letters of credit, as dollars dried up in the system. Many of the banks have also engaged in swap arrangements with the Central Bank of Nigeria (CBN) with the dollar raised through the Eurobond, helping boost the country’s external reserves.
Data from the CBN yesterday, shows that the country’s external reserves hit a new three-year high of US$33.1 billion as at October 12. It is the highest reserves achieved by the country since December 2014.
Since fourth-quarter (Q4) of 2016, three top banks and a mid-tier bank have issued medium-term Eurobonds valued at $1.7billion.
They are: Zenith Bank Plc ($500 million); United Bank for Africa Plc ($500 million); Access Bank Plc ($300 million); and recently, a tier-2 lender, Fidelity Bank Plc, issued $400 million Eurobond, bringing total Eurobonds issued within the period to US$1.7 billion.
Total outstanding value of Eurobonds issued by Nigerian banks and listed on the FMDQ stood at US$4.1 billion, with a total market capitalisation of US$4.18 billion. The coupon rates on the bonds ranged from 6.0 percent, to a high of 10.50 percent. So far, only Nigerian banks and the Federal Government have raised Eurobonds from the international markets. Non-banks and the sub-national governments, like the states and the local governments, have avoided the Eurobond, preferring to issue domestic debts instead.
Fitch Ratings said Tuesday, that the return of Nigerian banks to the international bond markets, marks “a small step towards, reducing maturity mismatches between foreign-currency (FC) assets and liabilities.
“This is credit positive, as it lessens FC liquidity risk, but the impact will be modest, as the new bond issuances are small, relative to total term FC lending,” according to the global rating agency, adding that more banks may follow.
Bolade Agbola, Lagos based Analyst and CEO of LAM Agro Consult Limited, said the success of Nigerian banks in raising fresh money from the international bonds market provides opportunity for them to address the mismatch between their foreign assets and liabilities occasioned by the Nigerian foreign exchange crisis.
Agbola warns that Eurobond issuance is not risk free, a factor banks have to watch.
“Banks have to be careful in booking fresh foreign currency denominated loans because of the nation’s fragile recovery, as any crisis in the oil industry may take the economy back to recession, even as the medium term outlook of the oil sector is not assuring”, Agbola said.
Analysts also believe that banks that have issued Eurobonds could use them to boost their earnings.
“Given their strong dollar liquidity, following their Eurobonds Issuance in the last few months, United Bank for Africa (UBA) Plc, Zenith Bank Plc and Access Bank Plc, will continue to report strong numbers from derivative transactions,” states Clement Adewuyi, research analyst, Financial Services CardinalStone Partners, in a recent third-quarter (Q3) earnings outlook.
“Our investment case for UBA is premised on its higher earnings diversification, as well as better non-interest income, given its improved foreign exchange liquidity position, following the issuance of $500 million Eurobond”, CardinalStone said.
UBA is the first among its peers to publish its nine-month results, which show gross earnings increased by 25 percent to N333.91billion, from N265.53billion in the comparable period of 2016. The lender’s interest income for the review nine month 2017 period, increased by 30.11 percent to N238.09billion, from N182.99billion in the corresponding period of 2016.
“UBA reported a strong growth of 25 percent in gross earnings, on the back of improved income in interest and non-interest income. Despite the reduced volatility in the foreign exchange market, the bank impressively grew its trading and foreign exchange income by 41.30percent,” said analysts at Lagos-based Capital Bancorp Plc.
Sources of longer-term Foreign Currency funding are limited for Nigerian banks and Fitch estimates that foreign currency funding equates to less than half of foreign currency sector loans. Outstanding dollar bonds issued by banks, totalled $4 billion at end-June 2017, the bulk of which are in Eurobonds.
Renewed interest from international investors seeking yield has enabled several banks to issue Eurobonds since late 2016, for the first time since 2014, albeit at higher yields, following rating downgrades in the intervening period. In most cases, the issuance will boost foreign currency funding, rather than simply refinance maturing dollar debt.
Nigerian banks have traditionally operated with significant maturity gaps, funding longer-term loans with short-term customer deposits, as is the case in many emerging markets. For foreign currency liquidity, there are no prudential limits put in place by the Central Bank of Nigeria (CBN).
The Central Bank of Nigeria’s regulatory liquidity ratio (requiring banks to hold liquid assets equivalent to 30percent of total deposits) is focused exclusively on naira liquidity. There are regulatory limits to control open FC positions in banking and trading books, but these targets the management of market risk and its potential impact on banks’ capital rather than liquidity risk.
The term of bank lending has gradually lengthened since 2012 when Nigeria opened up opportunities for investment in the oil sector. Fitch estimate that about half of all bank loans are medium-term, with maturities of three to four years. These are largely in foreign currency.
This is a high share for a low-rated market where banks have limited access to longer-term foreign currency funding. Foreign currency term loans have undergone considerable restructuring last year and this year, particularly among oil-related borrowers facing cash flow constraints given weak oil prices and disruptions in production.
The devaluation of the naira in mid-2016 also caused debt servicing problems, as borrowers reliant on naira revenue streams struggled to find additional funds to repay rising foreign currency obligations. Loan restructuring typically involves a two- to three-year maturity extension, pushing out final maturities to 2019 and beyond.
“It is expected that most of the Eurobond issuances by Nigerian banks will be targeted at restructuring these loans, or providing additional debt capital to turnaround the assets. There is however a growing concern that if these risk assets are not carefully handled, it could potentially lead to emergence of another era of toxic assets,” the law firm noted.
Iheanyi Nwachukwu & Hope-Moses-Ashike
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