Equity Analysis /
Nigeria

Nigeria Banks: CBN plans sector recapitalisation…after IFRS 9 forbearance

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Tellimer Research
    25 June 2019
    Published by

    The Governor of the Central Bank of Nigeria (CBN) announced that a recapitalisation of the banking sector is being planned, during a press briefing on 24 June 2019 to discuss the CBN’s five-year policy direction. The recapitalisation is intended to enhance financial sector stability and counter the impact that the NGN devaluation has had on Nigerian banks’ global positioning. During an exercise in 2010, the threshold for internationally licensed banks’ shareholders’ funds was set at NGN50bn, while domestic banks were required to maintain NGN25bn. This amounts to US$330mn and US$165mn respectively, using the cNGN152/US$ FX rate for 2010.

    FBNH, FCMB, Fidelity and Access are most at risk. This is an unexpected development, especially as the CBN recently granted forbearance on implementing IFRS 9, permitting banks to recapitalise over a three-year period following significant provisioning in FY 18. Also, it is unclear whether any new benchmark will be set against banks’ shareholders’ funds, the absolute regulatory capital base or the capital adequacy ratio. Based on the CBN’s recently published Five-Year Policy Thrust document, implementation should occur in 2019-24, and given the current state of our covered banks’ balance sheets (Table 1 overleaf) we do not anticipate a sector-wide capital raise. That said, FBNH, FCMBFidelity and Access could face some pressure among our covered banks.

    Regulatory uncertainties are a cause of concern. Our top picks remain GTBZenith and Stanbic, as these have both the highest CAR and ROEs (see Table 3). We believe these banks are best positioned to absorb negative shocks to the sector, especially following this development and an earlier announcement on possible restrictions to banks’ government treasury holdings. This news could also dampen sentiment for risk asset growth if banks consider it necessary to preserve capital, which would further pressure growth for the sector and economy. Nigerian banks currently trade at FY 19f PB of 0.4x, a 51% discount to frontier banks.

    The new capital threshold could just be based on absolute shareholders’ funds, which we see as a strong possibility. Assuming that the CBN maintains the same US$-based capital levels set in 2010, most of our covered banks are unlikely to come under pressure, as shown in Table 1 below, with the exception of FCMB and Fidelity which are short on and close to breaching our projected revised benchmark, respectively. Smaller banks within Tier 2, most of which are not publicly listed, are likely to be most in need of fresh capital and become targets for further M&A activity within the sector. 

    Basing a new capital benchmark on the CAR would put more of our covered banks under pressure. Notably, FBNH and FCMB would have fallen below their relevant CAR benchmark at end-FY 18, while Access fell within 0.2ppts of breaching its threshold following its absorption of Diamond’s bad loans in Q1 19. We also flag Fidelity as being at risk (2.0ppts above threshold at end-FY 18), given its ambitious growth plans and recent loan growth.