Nigerian Lenders’ African Expansion Face New Hurdles
Nigerian lenders including Guaranty Trust Bank Plc (GUARANTY) and United Bank for Africa Plc may retreat from opening units across Africa after a central bank directive that stops them from funding foreign subsidiaries, analysts at FBN Capital and Standard Bank Plc said.
Banks must obtain new funds to recapitalize their foreign units and won’t be allowed to use money already raised by their parent companies, the Central Bank of Nigeria said in a statement published on its website on July 26. Lenders that can’t raise additional capital for foreign subsidiaries “in the host market” will have to close the units, the Abuja-based regulator said.
At least seven of Nigeria’s 19 lenders, six of them in the Bloomberg NSE Banking Index (NGSEB10) of 10 most capitalized stocks, operate units across Africa. Guaranty Trust Bank, the West African nation’s biggest lender by market value, owns units in Gambia, Sierra Leone, Ghana, Liberia, Ivory Coast and the U.K. UBA, Nigeria’s fourth-biggest bank, has 15 of its 19 foreign subsidiaries in Africa and expects them to contribute 25 percent of its profit this year, Chief Executive Officer Phillips Oduoza said on a conference call on July 18.
Zambia’s decision in January that foreign lenders must have a capital base of $100 million affects Lagos-based UBA and Access Bank Plc (ACCESS), which operate units in the southern African country. Kenya, Ghana and Gambia have also increased minimum capital requirements for foreign lenders in the past 12 months.
Zimbabwe is giving banks until the end of September to increase their minimum capital to $100 million from $10 million for investment banks and $12.5 million for commercial lenders, central bank Governor Gideon Gono said today in Harare, the capital.
Nasir Ramon Olanrewaju, a spokesman for UBA, said he had no immediate comment on the Nigerian central bank decision and was awaiting a “clarification” of the company’s position before making a statement. Calls to the mobile phone of Lola Odedina, a spokeswoman for Guaranty Trust Bank didn’t connect. Access Bank spokesman, Olusegun Fafore, said he had no comment when contacted on his mobile phone.
Guaranty Trust Bank gained for a second day, rising 1.2 percent to 17.30 naira in Lagos, the highest in more than a week. UBA advanced 3.3 percent to 4.39 naira, the most gained in two weeks. The Bloomberg Nigeria Banking Index, which has risen 27 percent this year, fell for a third day, down less than 0.1 percent to 348.32.
“Nigerian banks with expansion ambitions will have to appropriately assess the viability of the markets before opening branches,” Samir Gadio, emerging markets strategist with Standard Bank in London, said on July 27 in an e-mailed response to questions. “Banks with a number of subsidiaries in sub- Saharan Africa will need to evaluate those businesses and their market outlook considering that the subsidiaries will have to raise capital in the host country or offshore,” he said.
Zambia’s decision to raise the capital base for foreign banks was probably the trigger for the Nigerian central bank response, said Bunmi Asaolu, an analyst at FBN Capital in Lagos. The rule may instead make local lenders acquisition targets as the companies have to keep cash in Nigeria, he said. UBA will seek a local banking license, which requires a lower capital base of $20 million, to meet the requirements, Oduoza said.
Nigeria’s central bank fired the chief executive officers of eight of the country’s lenders and bailed them out with 640 billion naira ($4 billion) as a debt crisis caused by loans to stock speculators and fuel importers threatened the industry in 2008 and 2009. Three were nationalized when regulators deemed them unable to meet a recapitalization deadline and the rest were taken over by new investors.
The requirement to increase funding for foreign units has “exerted enormous pressure on the capital base of most parent banks,” prompting the measures taken, the Abuja-based regulator said. Lenders should consider alternatives including mergers and acquisitions or sourcing of funds through capital markets and private placements for their foreign units, the regulator said.
“Under no circumstance are parent banks allowed to guarantee the deposits of their foreign subsidiaries,” the central bank said in the statement on July 26.
“From a funding perspective and a risk perspective we would see that as a much better and prudent approach to going into a country,” Denzil De Bie, a director at Fitch Ratings, said in a phone interview from London today. “It would remove the temptation to grow for the sole purpose of expansion.”
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