We reiterate our Buy recommendation on UBANL 2022s: Recent performance in the Nigerian bank eurobond market has been driven by positive technicals. The UBA bond has not performed as well as some other securities including the Zenith Bank (ZENITH) 7.375% 2022 and Fidelity Bank (FIDBAN) 10.5% 2022. UBANL is quoted about 80bps wider than the ZENITH 2022s and 135bps tighter than the FIDBAN 2022s. We reiterate our Buy recommendation on the UBANL bond.
FBNNL and ECOTRA subordinated bonds have been called: Access Bank redeemed a US$400mn subordinated bond in June. First Bank of Nigeria has called its US$450mn subordinated bond, and will repay this amount on 23 July. Ecobank Nigeria has also called its US$250mn subordinated bond, with repayment now expected on 14 August. Both First Bank of Nigeria and Ecobank Nigeria will exit the eurobond market following the call dates (though the parent company of Ecobank Nigeria does have a bond outstanding). After 14 August, there will be no US$-denominated subordinated Nigerian bank bonds outstanding.
Regulatory risk is rising: The Central Bank of Nigeria (CBN) recently announced that a minimum loans/deposit ratio of 60% will be required from the end of September. The regulator has also reduced the maximum remunerable amount under the Standing Deposit Facility to NGN2bn from NGN7.5bn. These measures are just two examples of changes the regulator is making to encourage banks to lend. We acknowledge that these changes introduce uncertainty and may lead to concerns about profitability and asset quality. However, as discussed in a previous report, we do not believe a regulator that rescued Polaris Bank (formerly Skye Bank) and was instrumental in Diamond Bank’s merger with Access Bank will implement changes in a way that compromises financial stability.
Could 2020 be the year of primary market resurgence? The much-discussed dearth in eurobond supply partly reflects subdued demand for foreign currency loans. Could this change? There are signs it could. There are at least three reasons for this. (1) Based on Bloomberg data, a US$3.25bn dual-tranche Dangote Industries loan matures in August 2020. If this facility is renewed with participation from Nigerian banks, we could see primary market activity increase. (2) Headlines suggest lending to the oil & gas sector may be on the rebound. As examples, in a recent presentation, Seplat stated that funding for a US$700mn gas processing project will be provided – in part – by local banks. In addition, earlier this month, Green Energy International Ltd, which is developing a marginal field, announced that it had signed an MoU for a total package of US$350mn (though this funding appears to have come from international banks). (3) The CBN has stated that the banking sector will be recapitalised over the next five years, leading some to speculate that as in 2004/5, the minimum amount of capital required to operate may be increased. This could lead to further M&A in the banking sector. If this happens, it is possible that some banks may choose to fund such activity by issuing new bonds (though we acknowledge that equity funding may well be preferred by the banks, and/or by the regulator).