Nigeria’s investment banks feel the squeeze
Like everything else in Nigeria, investment banking will be hit by weak oil prices. Local players may struggle more than their global counterparts.
Crude oil spills from a pipeline in Dadabili, Niger state
Nigeria’s financial landscape has been evolving at lightning speed. After South Africa, it has one of the most developed banking and capital markets environments in Africa. A new president, a flood of educated and skilled diaspora back to Nigeria and abundant natural resources mean that Nigeria has all of the ingredients to thrive.
Global, regional and local banks alike, buoyed by the country’s attractive demographics and increasingly successful track record, are expanding their business offerings. Following a bout of Nigerian banks issuing hard currency debt, corporate investment banking to support the burgeoning private sector is becoming increasingly commonplace. Global and regional banks offer extensive international networks, while local banks have local expertise needed to navigate complex rules and regulations.
Chapel Hill Denham, Euromoney’s choice for Nigeria’s best investment bank this year, stands out as a local player working on international deals. Chapel Hill highlights how local Nigerian investment banks are making their way to the big leagues.
Unfortunately, like most of Nigeria’s current problems, weak oil prices too could have huge ramifications on Nigeria’s investment banking landscape. Local banks, including the likes of Access Bank, Zenith Bank, Diamond Bank and Guaranty Trust Bank, have all issued Eurobonds in recent years to shore up capital and support corporates that have excelled as a result of Nigeria’s oil industry.
The ability of some of these corporates
But the ability of some of these corporates to repay debt is under duress. In Nigeria, oil is largely subsidised by the government so companies that distribute oil to the pump usually invoice the government for the difference. However, as government revenue has decreased because of the fall in global oil prices, the government – which has never particularly been good at paying its oil bills – has found it increasingly difficult to pay oil distributers.
As a result, delays in government payments have had a knock-on effect as oil and gas companies in Nigeria have found it increasingly difficult to fulfil debt obligations. Restructuring debt and increasing provisions has become a priority for some Nigerian banks, which lack the ability to leverage off of the balance sheet of a larger international players.
The effect is that investment banking in Nigeria is slowing. Year to date, there has been only one Eurobond out of Nigeria, a $750 million issue by the African Finance Corporation, and one IPO by Transcorp Hotels, which listed $23 million worth of shares on the Nigerian Stock Exchange in January. M&A volumes have also been lower than expected this year with 21 deals done so far.
The country’s lightning speed development in investment banking, especially in terms of ground gained by local players, won’t rumble to a complete halt but will probably remain subdued in the coming months. While larger regional and global players have been picking up the work, local players may find it a lot more difficult to operate in this climate.
The winner of best investment bank for next year’s awards period, and whether it’s a local or global player, will judge how these dynamics play out.