Story highlights

• Nigerian banking stocks have suffered a sharp decline in the second quarter, exacerbated by the Central Bank’s recapitalization directive.
• The FUGAZ stocks, comprising major Nigerian banks like FBNH, UBA, GTCO, Access Corporation, and Zenith Bank, have entered a bearish phase, with share prices significantly declining in anticipation of rights issues.
• Financial analysts have noted that the share price decline typically accompanying rights issues is due to the offer of shares at prices below market rates to entice existing shareholders, thereby increasing the supply of shares and putting downward pressure on prices.

Nigerian banking stocks have experienced a dismal second quarter thus far. This downtrend follows the Central Bank’s announcement on banking recapitalization, which has set expectations for further declines in share prices.

Investors, particularly those with substantial interests in major Nigerian banks, tell Nairametrics they are bracing for these potential drops. Early trends suggest their expectations of lower share prices is panning out as they gear up for non-dilutive rights issues.

These rights issues are typically the first step in the capital-raising process and could lead to further downward pressure on stock prices they opine.

Banking All Share Index

This trend is currently reflected in the performance of banking stocks. The Banking All Share Index, which tracks some of the most capitalized bank stocks on the Nigerian Exchange, is down 18% quarter-to-date, in stark contrast to the All-Share Index, which has seen a 6% increase over the same period.

• Year-to-date, Nigerian banking stocks have decreased by 6.8%, while the NGX All Share Index has risen by 31.37%.
• This is a significant reversal from the first quarter of the year, during which banking stocks posted a 14.6% return.
• At that time, the narrative was that bank stocks were undervalued both in terms of their earnings multiple and when evaluated in dollars.
• The momentum, however, has slowed recently, largely due to newly announced banking recapitalization plans.
• Nigeria’s Central Bank has mandated an increase in the minimum share capital, requiring international banks to hold N500 billion and nationally licensed banks N250 billion. This directive indicates that the banking sector must raise over N4 trillion (about $2.8 billion) within 18 months.

As a result, investor relations teams at banks are reportedly working overtime to meet these deadlines. But with billions of shares outstanding and freely floating, bank stocks are likely to face downward pressure in the short term as investors anticipate the rights issues.

FUGAZ stocks under pressure

The performance of tier-one bank stocks, which include FBNH, UBA, GTCO, Access Corporation, and Zenith Bank (FUGAZ), points to a bearish streak even as most adjust their prices ahead of dividend announcements.

In a recent Nairametrics report, nearly all the banks dropped below the one trillion market capitalization mark, with GTCO and Zenith barely hanging on. The valuation of FUGAZ bank shares is significantly declining in response to announcements of impending right issues.

• For example, FBNH, whose share price was quoted as high as N43 per share, is now down to N25 per share.
• One investor, who requested anonymity, suggested the stock could fall further to its year low of around N18, achieved on April 24^th, if it continues to be oversold based on their technical analysis.
• A market maker with ties to the bank suggested the bank’s planned N300 billion rights issue could be priced at N15.50 per share, pointing to the same price that was mooted when the bank first announced a right issue in 2023.
• Access Corporation, Nigeria’s largest bank by total assets, has already seen its share price fall to N17.4, just N1.4 shy of its own year low of N16 per share. Access Bank also announced plans to raise N365 billion via a rights issue.
• UBA, another tier one bank, has seen its share price drop from a year high of N33.95 to just N20.50. The board also approved a rights issue for the bank. The last time UBA raised capital via a rights issue in 2015, it did so at a share price of N3.50.
• The same trend applies to Zenith Bank and GTCO, which have also seen their share prices fall from year highs of N47.35 and N53 to N34 and N40, respectively.
• They are also shy of their year lows of N31.3 and N32.7. Both GTCO and Zenith have also announced plans for the right issue.

Although all the banks have announced plans to raise capital, the dates and share prices for the capital raises have not yet been announced

What they are saying

Speaking on the issue, the president of the Association of Capital Market Academics of Nigeria (ACMAN) highlighted that a decline in share price often coincides with a rights issue.

President of ACMAN, Professor Uche Uwaleke, said the trend is commonly observed as rights issues are usually extended to existing shareholders at prices lower than prevailing market rates, aiming to incentivize shareholders to subscribe for additional shares.

Consequently, the influx of shares into the market intensifies, particularly when shareholders choose to divest a portion of their holdings, exerting downward pressure on share prices.

“A fall in share price normally accompanies a rights issue. This is because rights issues are typically made to existing shareholders at prices below current market values to serve as incentives to the shareholders to take up additional shares. So, the supply of shares to the market is increased especially when those shareholders opt to sell part of their shares which end up depressing share prices,” he said.

The Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS), Olatunde Amolegbe, noted that a discernible reaction has been evident since last month following the release of the recapitalization timeline by the Central Bank of Nigeria (CBN).

He emphasized that investors consistently exhibit caution regarding dilution stemming from capital-raising endeavours, particularly those entailing equity augmentation.

Amolegbe anticipates that volatility in banking stocks is likely to persist until the completion of the Rights issues.

“We’ve started seeing that reaction since last month when the recapitalization timeline was released by the CBN. Investors are always wary of dilution that typically results from capital raising exercises especially those involving equity raise.

My expectations are that volatility in banking stocks will probably continue until the rights issues are completed”.

The Managing Director of Highcap Securities Limited, Mr. David Adonri, highlighted that the post-rights Issue price dynamics are typically influenced by the prevailing market sentiment.

In a bullish market environment, prices may experience an upward trajectory following such issuances. However, he cautioned that irrespective of market sentiment, an oversupply of stocks resulting from a new issue could lead to a decline in prices.

Adonri noted that the movement of banking stocks after an impending rights issue is subject to considerable uncertainty, owing to the volatile nature of stock market fluctuations.

Outlook for banking stocks

Despite potential headwinds for investors interested in banking stocks, these conditions still provide a unique opportunity for medium-term investments.

• Banks are perhaps uniquely positioned to achieve the highest profits in their history, bolstered by central bank policies that have enhanced their earnings from foreign exchange gains and income from risk-free government securities.
• However, risks still exist in the longer term, with capital raises likely to increase the number of outstanding shares. The more shares a bank has, the greater the pressure on it to deliver strong earnings per outstanding share.
• Banks also face potential challenges as the era of super profits, driven by current central bank forex and monetary policies, gives way to a reliance on income from riskier lending activities.

Investors also have one eye on risk-free government securities which attract interest rates as high as 20% compared to the stocks which are riskier despite being cheap.

• Global fund lauds Nigeria’s anti-money laundering initiatives

The International Monetary Fund (IMF) has explained why the Central Bank of Nigeria (CBN) should issue operating licences or register cryptocurrency dealers.

In its 2024 Staff Report released at the weekend, the IMF recommends that global crypto trading platforms be registered or licensed in Nigeria, like similar operators, the Bureaux De Change (BDCs), which are licensed by the CBN to carry out forex transactions at the retail end of the market.

The IMF advised that such crypto trading platforms should be subjected to the same regulatory requirements applicable to financial intermediaries, following the principle of same activity, same risk, and same regulation.

The CBN had announced that cryptocurrency traders used peer-to-peer trading to manipulate the naira exchange rate against the dollar and other global currencies. 

The apex bank asserted in February that Binance, the largest cryptocurrency exchange by trading volume, had processed $26 billion in untraceable transactions in its Nigeria unit alone. 

Binance serves 185 million users in over 180 countries worldwide. 

To protect the naira from value erosion and reverse the negative impact in the financial system, the CBN subsequently stopped banks and other financial institutions from banking cryptocurrency traders.

Aside several other factors causing naira’s slide, like rising import bills, medical tourism, and tuition fees payment abroad, exchange rate manipulation by cryptocurrency traders remains a major contributory factor.

IMF said: “Rapid growth of transactions on FX trading platforms poses new challenges. At the end of February, the authorities closed the operations of Binance and other crypto-asset trading platforms that were being used by Nigerians to facilitate capital flight – neither the identity of traders nor the origin of their funds could be traced.”

“The authorities also revoked the licences of 4,173 Bureaux De Change (BDCs) that failed to comply with CBN accounting and reporting requirements. Staff recommends that global crypto trading platforms be registered or licensed in Nigeria and subjected to the same regulatory requirements applicable to financial intermediaries following the principle of same activity, same risk, and same regulation.”

The IMF lauded Nigeria’s progress in the fight against money laundering and terrorism financing.

It said: “Nigeria has made welcomed progress on improving its Anti-Money Laundering and Combating Financing of Terrorism (AML/CFT) framework, but further action is needed in line with Financial Action Task Force (FATF) recommendations. Nigeria has undertaken a series of measures, including legislative reform, conducted a money laundering and terrorism financing risk assessment, built awareness for competent authorities and the private sector, and increased investigation and prosecution of money laundering to correct identified deficiencies in the AML/CFT framework.”

[TheNation]

Directors and key management personnel of Deposit Money Banks borrowed about N549bn from their financial institutions in five years.

This is according to The PUNCH analysis of the banks’ annual reports filed with the Nigerian Exchange Limited between  2019 and 2023.

However, the banks’ loans and advances to some directors and key management personnel as well as related party transactions dropped significantly in 2023.

These transactions dropped to N52.40bn for eight financial institutions compared to N111.31bn in 2022, indicating a 52.92 per cent decline in one year.

Financial institutions reviewed in the 2023 review include Access Holdings, Guaranty Trust Holding Company Plc, Zenith Bank Plc, United Bank for Africa, Fidelity Bank, Wema Bank, Stanbic IBTC Holding Plc and the FCMB Group.

This decline came amid the release of new corporate governance guidelines by the Central Bank of Nigeria which went into effect August 1, 2023.

In the circular dated July 13, 2023, and signed by Director, Financial Policy and Regulation Department, Chibuzo Efobi, the guidelines which imposed responsibilities on the bank board and the executive compliance officers, supersede other previous codes, circulars and related directives, according to the apex bank.

The CBN guidelines on related party transactions said, “Banks shall establish a policy concerning insider trading and related party transactions by directors, senior executives, and employees, as well as publish the policy or a summary of that policy on their website. 22.2 The policy shall contain appropriate standards and procedures to ensure it is effectively implemented. 22.3 In addition to the requirements in Section 22.2, there shall be an internal review mechanism carried out by the internal audit function of the bank, to assess the compliance and effectiveness of the policy.

“22.4 Any director whose facility or that of his/her related interests remains nonperforming in any financial institution for more than one year shall cease to be on the board of the bank and shall be blacklisted from sitting on the board of such bank and that of any other financial institution under the purview of the CBN. 22.5 No director-related loans and/or interest thereon shall be written off without the CBN’s prior approval.”

Leading the pack in terms of major decline in loans to related parties and entities controlled by key management personnel was Fidelity Bank Plc, which went from N92.31bn at the end of December 2022 to N2.09bn at the end of last year.

In footnotes, the bank however said that some of the related parties like A-Z Petroleum Limited, Dangote Group and Genesis Group as of 31 December 2022, had “exited the related party relationship post 2022 financial year in line with CBN requirement.”

In 2022, the total value of insider loans for 10 banks including Access Holdings, Guaranty Trust Holding Company Plc, Zenith Bank Plc, United Bank for Africa, Fidelity Bank, Wema Bank, Stanbic IBTC Holding Plc, FCMB Group, Unity Bank and Sterling Bank amounted to N131.04bn.

Fidelity Bank led the highest for the year, followed by Unity Bank at N17.32bn and UBA at N13.74bn.

In 2021, the loans to related parties of these financial institutions rose to N139.16bn with Fidelity Bank and UBA leading at N97.73bn and N15.28bn, respectively. GTCO trailed in third position with N6.859bn.

Between 2019 and 2020, a total of N226.6bn was disbursed as loans. In 2019, eleven banks borrowed its key management personnel a total sum of N29.65bn. The figure also includes loans to companies related to the directors.

An analysis showed that GTCO lent N155m, Zenith Bank  (N1.76bn), UBA borrowed its directors N297m, Wema Bank (N5.2bn), Stanbic IBTC (N95m), FCMB (N4.8bn), Unity Bank(N7.14bn), Sterling Bank (N10.12bn) to related parties.

In 2020, the figure increased by 564 per cent or N167.32bn to N196.97bn.

Checks showed that Access Bank lent the highest with a total of N174bn to its directors and companies related to them. This was followed by Unity Bank with N7.55bn. Third on the list was Sterling Bank with N6.01bn.

Other banks including Fidelity borrowed its directors N986.2m, GTBank (N67.9m), Zenith Bank (N1.797bn), UBA (N206m), Wema Bank (N2.82bn), Stanbic IBTC (N332m), FCMB (N3.2bn), Unity Bank (N7.55bn), Sterling Bank (N6.01bn).

Commenting on the trend, the Chief Research Officer at InvestData Consulting, Ambrose  Omordion said “In my language, they say, it is the yam that you know that you use to make pounded yam. If an organisation feels that the insider or director can pay the loans given to them, then there is no issue. It is when they do not pay that is where there would be issues.

“Like what is happening now in the economy, banks are not giving loans to ordinary companies unless those with names because of economic headwinds. If they give loans to the public and they are unable to repay, Non-Performing Loans will rise. If the banks offer to insiders that would pay, it is better for them.”

Adding a word of caution, Omordion said, that when done in excess and without due process, then it is bad.

“It is when it is done in excess that it is wrong. Even banks know how to safeguard depositors’ money, which is the most important thing.

“Now, that it (insider loans) is reducing, that’s a good thing for the industry and it is a good thing for regulators too.”

The Head, Financial Institutions Ratings – Agusto&Co, Ayokunle Olubunmi, pointed out that there was no correlation between insider loans and an increase in banks’ NPLs.

“Although it is not a crime to give a loan to someone within the organisation, there is a rule and it may not be at what we call arms length. Having said that, there is no correlation that when you give an insider a loan, it goes bad.  There are some banks with insider loans which have been fully paid. However, the risk is there that they may not have done full diligence. Some banks are more stringent when it comes to insider-related loans.

“Majorly because of the CBN corporate governance, you must disclose the amount, the collateral, and the account’s performance. This is why you will see it in the accounts of banks, so that any analysts, investor will see it and if it is non-performing, then it is a red flag.”

A financial analyst and Chief Responsibility Officer, Peculiar Innovative Consulting, Segun Aremu, lamented the prevalence of the trend in the Nigerian banking sector saying, “Insider loans are prevalent in our Nigerian banking system. It has been happening for a long time. These insider loans display a lack of corporate governance which discourages investors.”

“This situation also leaves banks prone to high NPLs and what I call low profit to the banks. Meanwhile, the banks should improve their financial intermediation role and give loans to the people who need it, the manufacturers and employers of labour to drive the economy,” he said.

From the minority investor community, the overall stance was that if the loans were performing and disclosed, then there were no causes for concern.

Chairman, Ibadan Zone Shareholders Association, Eric Akinduro, speaking with The PUNCH, said, “The point is that, if it is performing, we are okay with it. As long as it is performing and there is disclosure, there is no problem but when these factors are not present, that is where we have issues.

“When a loan is not performing, it will lead to a higher rate of non-performing loans. At the end of the day, it is not just about the shareholders alone. When a loan is not performing, it is to the detriment of that business. And it is of concern to shareholders. Non-performing loans can run the business down.”

The National Coordinator of the Pragmatic Shareholders Association of Nigeria, Bisi Bakare, said, “If they are getting the loans and the loan is performing, that means there won’t be growth in Non-Performing Loans.

She, however, called on the regulators to ensure that insider loans are not written off.

“The regulators need to take the bull by the horns and ensure that these NPLs are not written off,” she charged.

Nigeria’s quest for diversified foreign exchange earnings away from oil not feasible for now as revenue from the manufacturing export sector plunged 166 per cent to N778.4 billion from the N2.1 trillion height reached in 2019.

Operators in the sector blamed poor state of infrastructure, logistics and other binding constraints which they said have worsened the operating environment in recent years.

The trend since 2019 has been downwards recording significant decline to N960.7billion attributed to COVID-19 in 2020, while a minor recovery was recorded in 2021 at N1.15trillion. But in 2022 a huge drop to N781.1billion was recorded and another significant drop to N778.4 billion was recorded in 2023.

Within the same period, the share of manufacturing exports to non-oil exports also dropped to 24.8 per cent in 2023 from 82.4 per cent in 2019.  

In its Africa Pulse publication, the World Bank specifically blamed the country’s dwindling foreign trade on poor infrastructure and inefficient logistics, among other factors.

According to the World Bank, the cost of trade in Nigeria and Ethiopia is four to five times higher than what obtains in the United States due to insecurity, higher transportation costs, topography and poor road infrastructure. 

“Studies from the Africa region consistently find spatial differences in prices of imported goods (food and non-food) as well as non-traded agricultural staples, indicating that markets are not well-integrated, and retail prices of products are affected by distance.  

“For instance, trade costs are four to five times higher in Ethiopia and Nigeria than in the United States, due to poor road infrastructure, low competition in the transportation sector, and topography,” it stated.

The report further noted that the consequences of these distortions include preference of African producers to sell locally rather than export.

In a similar vein, statistics provided by the World Trade Organisation (WTO) revealed that South African manufacturing export value was $46 billion in 2022, which is 15 times higher than that of Nigeria which was $3 billion in the same year.  

Manufacturers and operators in the export ecosystem have lamented that the harsh business environment in the country is making local products uncompetitive globally.

They noted that many businesses that are into exports have gone into extinction, even as several multinationals have also exited Nigeria over the past few years.

MAN, exporters seek govt intervention  

Giving insights into what is happening in the sector, Director General of the Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, said: “The rising cost of doing business has worsened competitiveness of Nigerian products in the global market, which is evident in the drastic reduction in global demand for these products.

“The reduction in global demand for Nigerian products was further buttressed by the NBS report that confirmed that the manufacturing export value of Nigeria plummeted by 166% from 2019 to 2023.  

“In addition, the exorbitant lending rate of over 30 percent has contributed largely to a drop in the share of manufacturing exports to non-oil exports from 82.4 percent to 24.8 percent in 2019 and 2023 respectively.”

Speaking to the development, Chairperson of the Export Group of MAN (MANEG), Odiri Erewa-Meggison, stated: “Indeed, it’s concerning to see exporters not doing as well as they could.

“As you must appreciate, the cost of doing business in Nigeria has increased by more than 300 percent. Just take a cue from the recently increased electricity tariffs.

“How can exporters compete on a global scale without a deliberate intervention from the government? All hands need to be on deck.  

“Exporters need deliberate interventions such as access to loans at right rates, support with eliminating administrative bottlenecks and multiple regulatory checks by different regulators. A consolidated or harmonized regulatory approach would be preferred.

“Higher costs in electricity make it more difficult to produce. Biggest elephant in the room is the incentives which need reviewing and streamlining to ensure qualifying exporters take benefit without having to compromise by settling anyone to get their incentive like Export Expansion Grant (EEG).

“There is an urgent need for a stakeholders’ engagement between government and exporters to discuss and agree on a way forward.  

“If exporters are to commit to repatriating their full export proceeds back to Nigeria, there are certain things exporters will like the government to equally commit to. For example, there is a need to review the items on the exports proceeds list in the CBN foreign exchange manual to ascertain and ensure the list is still relevant and updated to suit current needs.”

Also reacting, Chairperson of the Export Group of Lagos Chamber of Commerce and Industry (LCCI), Mrs. Bosun Solarin, said: “In 2020, the then Vice President through the office of the Presidential Enabling Business Environment Council (PEBEC) tried to help small businesses by slicing the cost of production, like NAFDAC registration. “So from 2020, many small businesses emerged into production, and some of them have entered the export market.    

“Many of such businesses have gone into extinction because of various policies that are anti-business.

“When people have even found a way to come into business through export, they are confronted with so many bottlenecks, bad policies and insecurity.

“If we don’t pay attention to security so that people can go back to the farm, if we don’t pay attention to interest rate so that the productive sector can get money to do business, if we don’t pay attention to logistics so that people can even move their products with ease, then we have not started.

“Nigeria is signing off for the guided trade of African Continental Free Trade Area (AfCFTA) very soon, and logistics is a problem to even move things.

“These, I think are places where the government should pay attention.”

Exporters must adhere to trade norms – NEPC

Meanwhile, the Nigerian Export Promotion Council (NEPC) has charged Nigerian exporters to adhere to the requirements for exporting products to different countries.

Speaking at a recent sensitisation workshop aimed at enhancing Nigeria’s export potential and strengthening trade relations with China, Mrs Nonye Ayeni, Executive Director of NEPC, emphasised the need for exporters to adhere to the General Administration of Chinese Customs (GACC).

Ayeni, who was represented by Mr Samson Idowu, North-Central Coordinator of the council, said that GACC has clear but stringent requirements for exporting products to China.

“Understanding the registration process, documentation and regulatory changes is paramount for successful export. Understanding the requirements set forth by GACC is crucial for Nigerian exporters to ensure smooth and successful trade with China,” she stated.

National Single Window will bring relief – CPPE

In his comment, CEO, Centre for the Promotion of Private enterprise (CPPE), Dr Muda Yusuf, said the implementation of the National Single Window (NSW) initiative will go a long way in enhancing Nigeria’s foreign trade.

Yusuf stated: “When you have a process that is highly bureaucratic, it gives people the opportunity for physical interaction that also gives room for discretion, which is a fertile ground for corruption, extortions, delays and inefficiencies which are also affecting the cost of goods and services.

“The impact on business will be significant. No matter what sector you talk about, what happens in the import/export sector impacts the sector, directly or indirectly. 

Whether you are in manufacturing, mining, or whatever, as long as you import or export goods. And if you talk to those who clear these goods, they will tell you the kind of experience they go through.

“So, first, there will be an impact in terms of the efficiency because when you bring technology into a space, the value proposition is the efficiency that it brings. And efficiency reduces cost of operation, it reduces the time it takes to conduct the business”.

Nigeria loses $4bn to import-export infractions annually – Tinubu

At the recent launching of the NSW project in Abuja, President Bola Tinubu stated that Nigeria currently loses about $4 billion annually to import-export infractions due to bureaucratic bottlenecks, especially at the ports.  

According to the president, the NSW project is expected to ensure 24-hour clearance of goods at the ports and simplify trade by providing a digital platform for all import and export-related activities.

Tinubu said: “This initiative will link our ports, government agencies, and key stakeholders, creating a seamless and efficient system that will facilitate trade like never before. It will reduce the need to deal with multiple agencies in multiple locations to obtain the necessary papers, permits and clearances to complete their import or export processes”.

[Vanguard]