On May 18th, the Central Bank of Nigeria issued a statement barring the deployment of capital to local banks’ offshore subsidiaries, in a move that has sparked fears about Nigerian banks' regional growth prospects.
In the pre-Lehman bull run, top tier Nigerian banks boasted lofty foreign expansion plans while waxing lyrical about their supposedly strong capital buffers. After the Nigerian banking crash exposed the rampant mismanagement and capital shortfalls of the financial sector, the Central Bank of Nigeria (CBN) launched a root-and-branch reform of the industry.
Last month, the monetary authority introduced another measure to shore up domestic capital buffers - but at a potential cost to Nigerian banks'' offshore expansion plans. New banking policy issued by the CNB will bar local banks from guaranteeing the deposits of foreign subsidiaries and requires them to submit plans to show how their subsidiaries are fully capitalised by July 14.
The move will affect nearly all banks in Nigeria but the institutions that will feel the heat, in particular, are those with the highest number of offshore subsidiaries - United Bank of Africa and Access Bank, which have operations in 18 and nine countries respectively.
Over the past few years, some African countries, including Sierra Leone, Uganda, Kenya, Tanzania, Ghana and, more recently, Zambia, have raised the minimum capital requirements for banks operating within their jurisdictions. The CBN is concerned that, given the lull in capital markets globally, including in Nigeria, these increased capital requirements have exerted pressure on the capital bases of Nigerian banks, ultimately weighing on their profitability and competitiveness. In the CBNs opinion, the greater capital demands appear to bear little relation to growth opportunities in these countries in other words, this may not be an optimal use of capital
So banks in Nigeria have been given a mere two months to complete the requirements. Renaissance Capital summarises three capital-raising options:
The CBN has given the banks three options: 1) raise fresh capital from the offshore capital markets via private placements or public offerings; 2) pursue a merger or acquisition; or 3) if external capital raisings fail, submit a strategy for exiting the relevant foreign jurisdictions not later than 30 June 2012.
Heres the cost:
[This policy] poses a clear risk to future external growth prospects for Nigerian banks offshore. In addition, we highlight that the CBN has increased the minimum capital adequacy ratio for international banks (all banks in our universe have international licences) to 15%, from 10%, as stated in its Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2012/2013. Overall, we think the CBN needs to provide additional clarity about how this directive affects the banks offshore expansion plans, which for some banks are core to their medium-term growth strategies.
To his supporters, CBN governor Lamido Sanusis attempt to ensure domestic capital is not used to subsidize foreign operations highlights his pro-active regulatory zeal as the rise of regional banking groups and new cross-border products pose systemic risks. But bankers might complain this move reeks of financial protectionism at a time when foreign expansion in particular, to service Nigerian consumers and corporates abroad will prove crucial to long-term profitability prospects.