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
strategies.
No comments:
Post a Comment