Nigeria's troubles hold lessons for corporate IB
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Nigeria's troubles hold lessons for corporate IB

Commodity price drop will drive NPLs; difficulties could help local capital markets.

Corporate investment banking in sub-Saharan Africa has been a burgeoning business, with revenues in the region on the rise. Away from CIB hubs in South Africa and Nigeria, corporates in Kenya, Ghana, Angola, Mozambique, Zambia and Uganda increasingly benefit from investment banking channels in accessing additional capital.

But the recent fall in commodity prices, and subsequent currency devaluation in African countries, especially in Nigeria, mean investment banks will need to practice more due diligence when taking on new corporate clients, and CIB activity could slow down, says Victor Williams, head of Africa corporate and investment banking ex-South Africa, at Standard Bank.

“There is a lot of pressure on Nigerian corporates and the banking sector at the moment,” he says. “Corporates hope to restructure loans as their ability to honour debt repayments becomes more difficult and, at the same time, banks are looking to increase provisions. Nevertheless, NPL ratios will likely start to pick up as these measures may not be enough to prevent defaults.”

According to Renaissance Capital, as of September 2014, the average NPL ratio for the banking sector in Nigeria is 3.2%; the oil and gas sector accounts for 25.1% of total bank loans.

Victor Williams Standard Bank

 Local corporates are much more likely to turn to local currency capital markets from now on

Victor Williams,
Standard Bank

“The Nigerian experience should provide corporate and investment bankers with guidelines for how to approach the business in the region more broadly,” says Williams.


Despite Nigeria’s efforts to diversify its economic base, it remains heavily reliant on the oil and gas sector, which accounts for 35% of GDP, around 80% of total government revenue and 90% of exports.

Towards the end of last year, global crude prices fell by around half, reaching lows of $40 a barrel, before settling at around $63 a barrel currently. In response, Nigeria’s finance ministry slashed the budget in April by 20%, assuming a lower oil price benchmark of $53 a barrel, and the central bank has devalued the naira twice since February.

Government revenues have taken a hit and consumption has weakened as state bodies have been slow to pay oil and gas contractors – a heavily subsidised sector in Nigeria – as well as salaries. As a result, Nigerian oil and gas corporates are finding it harder to repay debt, while some upstream oil and gas projects have been suspended or cancelled altogether.

“The oil price reached lows and the naira fell to levels that went beyond the assumptions that had underpinned debt-banking cases. Now we are making our stress tests more robust when we consider such facilities to potential corporates, not only in Nigeria but in other markets as well,” says Williams. On June 29, the naira was trading at 226 to the dollar.

“We have seen a slowdown in Nigeria and the rest of the region, given current macroeconomic conditions, and investors and corporates are being quite cautious,” says Williams.

Indeed, up to now, Nigeria has been a great supply of revenue for Standard Bank’s CIB business. “In terms of revenue, our CIB business ex-South Africa contributed 45% of CIB’s total revenues in 2014,” says Williams. “Nigeria is the single largest revenue generator and other key countries include Kenya, Ghana, Angola, Mozambique, Zambia and Uganda.”

Nigerian banks have been some of the most active debt issuers, with Access Bank, Zenith Bank and Guaranty Trust Bank, among others, coming to the international debt markets to raise capital to support the oil and gas, real estate, infrastructure and power sectors. According to Dealogic, total deal volumes in Nigeria in all asset classes reached $12.41 billion in 2014. Year to date, volumes have reached $2.89 billion.

Many of the CIB opportunities in Africa have been a result of recent discoveries in natural resources. Tanzania, Uganda and Kenya have all recently discovered oil deposits, while Mozambique has one of the largest natural gas deposits in the world; some are close to commercialisation.


In a bid to protect depleting currency reserves, Nigeria’s central bank restricted access to the interbank currency market for the purchase of international bonds and shares, among other products, in June. As a result, issues around dollar liquidity have hit short-term trade finance and raised questions over longer-term dollar-denominated risk, says Williams.

“It looks as if regulators and central banks will have a tough time supporting borrowers when it comes to repaying foreign exchange liabilities in markets where foreign exchange is becoming limited,” he says.

“However, this could drive the case for the development of local capital markets. Before Fed tapering, and before the plummeting oil price, Nigerian and other African corporates were seemingly given the choice of either raising dollar debt on international markets with yields of around 7% or 8% or raising local currency debt at 14% to 17%. The rational answer then was obviously to raise dollars, as long as the system was supported by a central bank committed to maintaining stable exchange rates.”

Williams says the current environment has forced a change in thinking. “Not only are investment banks implementing stricter stress tests and pricing in exchange-rate risk, but I think that local corporates are much more likely to turn to local currency capital markets from now on,” he says. “While the figures may not be apparent immediately, I believe that a preference to issue debt and equity in local currency will soon start to play out.”

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