Don't panic, says Nigerian governor as bank shake-out looms

Source: Fin24, 31/07/2016

Lagos - Breaking the central bankers' taboo on the use of the
'p-word', Nigeria's Godwin Emefiele is urging people not to panic
about the banking system, saying he is on top of any trouble resulting
from the worst crisis in Africa's biggest economy for decades.


For now, depositors and investors are generally giving the Central
Bank of Nigeria Governor the benefit of the doubt after he shored up
mid-tier lender Skye Bank this month with a loan and replaced its
management when its capital fell below levels required by
regulators.


But pressure is building, with loan books - nearly half of them in
dollars - hammered by a shrinking economy, a plunging currency and
acute foreign exchange shortages, all a consequence of the slump in
the oil price for Africa's top crude producer.


Non-performing loans are expected to jump to 12.5% of total loans this
year, up from the central bank's target level of 5% at the end of last
year, as lenders suffer a hangover from an oil sector credit boom that
ended abruptly in 2015, according to Agusto & Co, Nigeria's main
rating agency.


Nigeria's 21 banks have been laying off staff, closing branches and
slashing earnings forecasts, but some are unlikely to survive the
storm, analysts say.


"It will affect their profitability initially and eventually it is
going to affect their liquidity and solvency," said Bismarck Rewane,
chief executive of Lagos-based consultancy Financial Derivatives.
"Because of the squeeze in profitability there will be a natural
consolidation and a shake out."


Any failure of the banking sector would have far-reaching consequences
in the nation of 170 million, with civil servants' pay routed through
the banks and residents of remote villages dependent on electronic
systems for routine payments.


Sterling Bank chief executive Abubakar Suleiman said in February a
naira drop of just 20% would trigger a "wave" of bank mergers. Since a
devaluation last month, the currency has lost double that against the
dollar.


Overall, 42% of loans extended by Nigerian banks are in dollars. If
the naira falls far enough, it will force some banks to recapitalise
to have enough naira to stay within financial stability limits.


"There is concern around the evolution of banks' capital adequacy if
the naira continues to weaken," said Standard Chartered Africa chief
economist Razia Khan. "As the naira weakens, FX loans are likely to be
problematic."


Delayed results
According to London-based analysts Exotix, UBA, Diamond and Guaranty
Trust Bank (GTB), which is Nigeria's biggest bank by market
capitalisation, have the highest ratio of dollar loans, at 50% apiece.
Diamond declined to comment, while UBA and GTB said they saw no need
for a recapitalisation due to the devaluation.


One Lagos-based banking analyst, who asked not to be named, said three
or four medium-sized banks might need to raise capital. The central
bank has said it is monitoring one or two lenders for liquidity,
without naming them.


Adding to uncertainty, GTB delayed its half-year earnings this week
pending an interim audit.


Two mid-tier banks, Skye and Stanbic - the local arm of South Africa's
Standard Bank - said they had not yet released first quarter earnings.



Some banks have themselves borrowed heavily in dollars, debt that now
costs much more to service.
Top of this list is GTB, which has $1.6bn in dollar-denominated debt,
followed by First Bank of Nigeria, with $915m, according to Thomson
Reuters data. First Bank was not immediately available to comment.


Anticipating problems from a weaker naira, investors have been selling
off banking stocks for the last year, sending the banking index in
January to its lowest since it was formed in 2009, and less than half
its level in mid-2014.


Many banking stocks - hot foreign investor picks a decade ago during
an 'Africa rising' boom - remain depressed after a 2009 sector
melt-down stemming from the global financial crisis.


Zenith shares are a third of their pre-financial crisis highs, Access
a quarter, and First Bank just 10%. GTB, by contrast, has recovered as
it has one of the lowest levels of non-performing loans and its shares
are now in line with their 2008 levels.


'Don't panic'
With the IMF forecasting a 1.8 percent contraction in the economy this
year, the immediate prospects for the banking sector are grim but
Emefiele was adamant the financial system remained solid.


"The strategic health of the Nigerian banking or financial system
remains strong at this time. There is no need for anybody to begin to
panic or worry that any bank is in distress," he said after a monetary
policy meeting this week.


"Depositors of banks, please, please endure. We appeal to you: go
about your business. You will not lose your deposits in any bank."
However, his soothing words, which followed a rush by depositors to
withdraw funds from Skye earlier this month, may have the opposite
effect, especially after police in May raided three banks - Access,
Fidelity and Sterling - as part of a probe into alleged illegal
transactions.
"The moment you start saying it, it raises eyebrows - why are you
saying that?" Financial Derivatives' Rewane said.


Another problem is the lack of transparency over so-called "insider
loans" to directors and shareholders. These are often not declared in
earnings statements in a timely manner, bankers say, making a bad
picture possibly even worse.


The Nigeria Deposit Insurance Corp, an independent federal agency,
said this week it was concerned "over the increasing wave of
non-performing insider loans in various banks and its consequences for
the stability of the nation's banking systems".