Wednesday, 20 June 2012

Recapitalisation of Foreign Subsidiaries

The Central Bank of Nigeria (CBN) released a circular on 18 May 2012, addressing the recapitalisation of foreign subsidiaries by
Nigerian banks. In a nutshell, banks will no longer be permitted to deploy capital from Nigeria to recapitalise offshore subsidiaries.

What is the CBN saying? The circular states the CBN will not permit any further capital to be deployed from parent
banks (Nigerian-based) to strengthen or recapitalise their foreign subsidiaries. The directive also bars Nigerian banks from
guaranteeing the deposits of their foreign subsidiaries. Additionally, it requires banks with foreign subsidiaries to submit, within a two-month period from the circular’s date, plans to ensure that their subsidiaries are fully capitalised in the light of anticipated regulatory capital increases under Basel II and III and any other unforeseen increases by host countries.

What are the regulator’s concerns? 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 CBN’s 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.

What now for affected banks? Most of the banks under our coverage are affected by this directive, with the exception
of Fidelity Bank, which is a pure Nigerian play, albeit with an international licence. 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.

 Who will be most affected? Among our coverage universe of Nigerian banks, we think UBA and Access Bank will be
the most affected, given that they have the highest number of offshore operations within the sector. UBA has operations in 18
offshore countries, while Access Bank is operational in nine. According to management of both banks, they face the most nearterm pressure in their Zambian operations, where the minimum capital requirement for foreign banks has been raised from $2mn to $100mn (and to $20mn for local banks), with a 31 December 2012 deadline for full compliance. UBA and Access Bank are considering a variety of options, including 1) raising capital domestically in those jurisdictions; 2) M&A; 3) converting to a local bank licence by selling a stake to local investors; and 4) asking for an extension to the deadline. Other options hinted at by the banks’ management include listing some of their foreign subsidiaries in markets where there are no capital restrictions and recapitalising subsidiaries via this route. Access Bank is already working on the disposal of one or more offshore subsidiaries.

We highlight that while the intention of the CBN’s directive appears to be to retain capital in Nigeria, it seems more focused on
the recapitalisation of Nigerian banks’ existing subsidiaries, while there is less clarity about the deployment of capital for
future/new subsidiaries. On this front, we highlight First Bank and GT Bank as banks that could be affected, given their planned
expansions outside Nigeria in the medium term.

Bottom line? Generally, we welcome the increases in minimum capital requirements by several African central banks –
increases that, in our opinion, reflect efforts to strengthen the banking sectors in those countries. This is not just an African
theme – global banks have also been seeking ways to boost capital adequacy ratios in their home countries to meet increased
capital requirements under Basel III, and one option they have explored has been the disposal of international subsidiaries. We
take comfort from the fact that Nigerian banks in general are still well capitalised and view the regulator’s directive as more
proactive than reactionary. On the other hand, it 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

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