Nigeria's banking sector looking ever healthier after recovering from the last crisis

Nigeria’s banks have been through some challenging times in recent years, but for all their travails, they have turned in an impressive performance and continue to present a compelling narrative to foreign investors. However, the challenging times are not over just yet. West Africa’s largest banking sector – accounting for 74% of regional banking assets and now fully recovered from its last crisis in 2009 – is facing structural changes that affect its traditional profitability drivers. Regulatory reforms that have an impact on both interest margins and fee income are pushing banks to specialise as well as enhance their outreach and lending.

The recent benchmark interest rate hike on the part of the Central Bank of Nigeria (CBN), to 13%, and the devaluations of the naira, down by nearly 30% in just three months to $1:N198, are likely to affect debt servicing on loans denominated in foreign tender (see analysis). Against the backdrop of falling oil prices and a rising dollar, this could have a ripple effect on banks’ asset quality, as well as disposable income and retail loans. Indeed, at least 10 deposit money banks in the country are expected to restructure their oil and gas assets in the wake of the drop in oil prices in late 2014. According to Razia Khan, the head of Africa research at Standard Chartered Bank in London, Nigeria would be unable to make Excess Crude Account (the country’s equivalent of a sovereign wealth fund) savings in 2015, and foreign exchange reserves would remain under pressure. Khan also forecast double-digit inflation and a further increase in interest rates, to 14%.

Promise

At the same time, there is certainly room for growth. Just 20% of the population is banked, according to KPMG, and the banking sector’s total loans of N10.49trn ($64bn) account for 13.1% of rebased 2013 GDP. With new foreign entrants scrutinising opportunities presented by the sell-off of nationalised banks, existing players will need to improve their operational efficiency just as the regulator, the CBN, establishes the infrastructure for mass-market lending. As banks tap offshore sources of long-term funding for expansion, it is of the utmost importance to exercise caution in avoiding significant currency mismatches and a buildup of new loan defaults in the sector.

Post-Crisis Recovery

 It took more than three years to fully cleanse the market of the excesses of the post-2004 consolidation boom. Following a ten-fold increase in banks’ capital requirements – to N25bn ($152m), effective from end-2005 – the sector underwent a massive consolidation that saw the number of banks fall from 89 to 25 in the space of two years – now down to 24 after the 2007 merger of Stanbic and IBTC. As industry assets more than doubled in this time frame, from N3.2trn ($19.5bn) to N6.56trn ($40bn), according to figures from the CBN, banks both expanded geographically, building new branches domestically and regionally, and broadened their scope into new markets, ranging from stockbroking to insurance.

However, given certain excesses – including margin lending to affiliated brokers that used the funds to speculate on the Nigerian Stock Exchange (NSE) – the outflow of foreign funds in early 2008 metastasised into a build-up of non-performing loans (NPLs), which rose from 6.3% to 27.6% in 2009 alone. Upon gaining office in June 2009, the new CBN governor, Lamido Sanusi, intervened heavily in the market, injecting some N620bn ($3.78bn) of Tier-2 capital to stabilise nine failing banks, extending a blanket guarantee on deposit and interbank obligations, and suspending the management of eight lenders. The central bank then set up the Asset Management Corporation of Nigeria (AMCON) in July 2010 to purchase the banks’ toxic assets, acquiring a total of N4.2trn ($25.6bn) in debt at a haircut value of N1.76trn ($10.7bn), which was paid for in AMCON bonds. It arranged a fire sale of five of the country’s faulty lenders to other banks and investors, and nationalised the remaining three banks.

To foster greater stability, the banks then worked to rebuild their capital bases. The industry’s average Tier-1 capital ratio rose from 4.5% in June 2011 to 18.1% by December 2011 and 18.5% by June 2013, while the NPL ratio fell from a peak of 28.8% in June 2010 to 5.3% by December 2011 and 3.7% by June 2013, according to the IMF. Intervention came at the cost of credit expansion, which rose from 25.3% of GDP in 2007 to 38.6% in 2009, before falling to 24.9% in 2010, 21.1% in 2011, 20.8% in 2012 and 13.1% in 2013, CBN figures showed.

Performance

Growth in banks’ aggregate assets accelerated from 6.4% year-on-year (y-o-y) in 2012 to 12.2% in 2013, reaching N24.37trn ($148.7bn) in January 2014. As of January 2015, the sector’s assets stood at N27.68trn ($168.9bn), according to the CBN’s most recent economic report. Meanwhile lending growth rose from 11.4% in 2012 to 13.7% in 2013, reaching N9.1trn ($55.5bn) in outstanding loans by January 2014.

Analysts expected continued growth in 2014 as the CBN pushed banks to create more risk assets – investment advisory firm Afrinvest forecast 8.3% y-o-y growth in assets to N26.4trn ($161bn) by end-2014, while ratings agency Standard & Poor’s expected 30% lending growth to N11.8trn ($72bn).

Limited Intermediation

For all this growth, intermediation remains marginal to the broader economy – a situation not dissimilar to most African frontier markets, where lending is concentrated in certain sectors of the economy. “Banks lend to large multinationals mostly in the oil and gas and oil-related sectors,” the IMF noted in its May 2013 financial sector assessment programme. “Banks have tightened their underwriting standards since the 2009 banking crisis.” With lending highly concentrated among relatively few corporations, and retail clients accounting for less than 10% of the top five banks’ loan books, according to an April 2014 report by Ecobank. Total loan penetration, meanwhile, rose a mere five percentage points in the last decade, according to British investment bank Exotix.

Profit Structure

The country’s relatively low banking penetration is partly explained by most banks’ traditional business model. “High fee/loan ratios and cheap, inflation-adjusted funding costs are key profitability drivers of Nigerian banks,” according to HSBC’s September 2013 study of the four largest Nigerian banks. Fees and commissions, however, account for a relatively low share of the banks overall profit – less than 10%, as Kehinde Lawanson, former executive director at First Bank, told OBG. Far more significant have been interest margins, which rose from 49.4% of gross income in June 2011 to 65.2% by June 2013, per IMF figures, while net interest income was around 7.8% of interest-bearing investments for the top five banks in the third quarter of 2013, according to Ecobank.

Extensive branch networks have generally been used to generate deposits rather than extend loans, with the majority of deposits (73.7% in 2013) in maturities of less than one month – a trend common in many emerging markets. The number of bank branches in Nigeria has risen from 3535 in 2005 to 5765 in 2012 (plus 1170 microfinance branches), according to financial sector NGO Enhancing Financial Innovation & Access (EFInA).

The 2013 HSBC report estimates that the effective interest rate paid on deposits by the top four banks in the country was 2.5% in 2012. Although the top 12 banks’ ratio of loans to deposits rose from 55.02% in the fourth quarter of 2012 to 58.55% one year later, according to CBN data, this remains low compared to 2013 data for South Africa (88%) and Francophone West Africa (73.2%), and below the CBN’s 80% ceiling.

Other capital is placed in government securities, where three- to 12-month Treasury bills yielded 11. 9-13.6% as of April 2014, while benchmark 10-year bonds yielded around 12.5% (see Capital Markets chapter). Despite a post-crisis rebound that saw return-on-equity (ROE) at top-tier banks jump from 6.34% in 2011 to 22.48% in 2012 and 22% in 2013, profitability remains lower than that of the largest banks in Ghana (33% ROE) and Kenya (25%) in 2013, according to Ecobank.

Crowded Market

Aggregate figures obscure significant differences between Nigeria’s 24 commercial lenders. Central to the post-crisis restructuring was the CBN’s ring-fencing of deposit-taking institutions from other financial services businesses like investment banking and insurance. Barred from the universal banking model that characterised the post-2004 era, investors could either incorporate holding companies for these activities or sell off auxiliary activities. Five banks initially opted for the former – “holdco”, in the jargon – with three banks ultimately moving forward with the restructuring. The CBN also segmented capital requirements according to four types of licences: N25bn ($152.5m) and a 10% capital adequacy ratio (CAR) for national commercial banks; N100bn ($610m) and 15% CAR for banks operating internationally (barred from recapitalising foreign subsidiaries from Nigeria); N15bn ($91.5m) for merchant banks barred from taking deposits; and N10bn ($61m) for specialised banks and regional banks, including sharia-compliant ones.

By 2013, a clear two-tier market had emerged: an upper tier of five banks commanding 52% of assets, and a second, more diverse tier ranging from the top three mid-sized banks, which controlled another 28% of assets, to small, specialised lenders.

According to the CBN, around 80% of banks had capital levels in line with Basel II as of November 2014. “Basel II has been well telegraphed by the CBN,” Omar Hafeez, managing director and CEO of Citibank Nigeria, told OBG. “Governance is now tighter, not only in terms of human resources and executive tenure, but also in terms of risk management and sustainability. But what is even more key is how well-capitalised most banks now are to absorb shocks and hedge against certain risks.”

FBN

Established in 1894, First Bank of Nigeria (FBN) is the country’s largest bank by assets, with N4.2trn ($25.6bn) as of the third quarter of 2014. A holdco with subsidiaries in insurance, mortgages, investment banking and microfinance, as well as 11 offices offshore, FBN Holdings counts 560 branches and over 8.5m clients. It holds the largest share of deposits at N2.9trn ($17.7bn), of which 27% come from the public sector, and achieved the highest gross earnings in 2013 at N396bn ($2.4bn), although these grew at just 5.32% y-o-y, according to Cordros Capital. Given an increase of 0.4 percentage points in its cost of funding that cut its net interest margin (NIM) to 7.8%, and a 11.91% yo-y contraction in its non-interest income, FBN ranked third by profitability in 2013, with profit before tax of N91.35bn ($557m). It also had the lowest CAR of the top five banks (17.7%), the second-lowest ROE (15.5%) and the second-highest cost-to-income ratio (63.02%).

Zenith

Close behind with N3.41trn ($20.8bn) in assets, Zenith Bank has focused on the corporate segment since its founding in 1990. Structured as a stand-alone international bank with four offshore subsidiaries, it counts roughly 500 branches catering to 2m accounts. It holds the second-largest deposit base, at N2.27trn ($13.8bn) as of end-2013, and saw strong gross earnings growth of 14.45% y-o-y to N351.4bn ($2.1bn), second to FBN. Having reduced its cost of funding by 0.25 percentage points thanks to its large share of private-sector deposits, Zenith achieved a healthy 8.7% NIM, yielding the highest profit before tax at N110.6bn ($674.7bn). It also has the highest CAR at 26%, and the second-lowest cost-to-income ratio at 55.66%, which earned it the third-highest ROE of the top tier at 19.6% in 2013.

UBA

The third-largest player, United Bank for Africa (UBA), with assets of N2.65trn ($16.2bn), is the product of six banks’ mergers post-2004. UBA has catered to all main segments domestically and has proven the most aggressive in expanding abroad, now active in 19 African markets. With the largest network, at 750 branches and 7m clients, UBA spun off its domestic non-bank interests but incorporated its international subsidiaries and domestic investment bank as a holdco. Ranking third also by deposits, at N2.22trn ($13.5bn), and by gross earnings, at N264bn ($1.6bn), which grew a record 20.24% y-o-y in 2013, in the last two years the bank has focused on consolidating its business to lower its cost-to-income ratio of 60.86%, the third highest. While its 5.9% NIM, the lowest of the top five, has kept profitability in fourth place, at N56.1bn ($342.2m) in 2013, the bank still has room for growth, with a CAR of 23.2% and a ROE of 21.8% (second highest).

GTB

The last two members are newcomers to the top tier since the 2009 crisis. Guaranty Trust Bank (GTB) held assets of N2.24trn ($13.7bn) as of the third quarter of 2014, and since 2013 has focused on expanding into the mass retail market from its traditional niche of higher-income earners and corporates. A standalone international bank operating subsidiaries in six African markets, and the first to expand to East Africa by acquiring Kenya’s Fina Bank in 2013, GTB runs 201 branches catering to 4.3m clients. It also ranks fourth both by deposits, at N1.44trn ($8.8bn), and gross earnings, at N242bn ($1.45bn). The most efficient bank, with a cost-to-income ratio of 42.84%, GTB had the second-highest profit before tax at N107.1bn ($653.2m), while its profit after tax was the only one to rise, by 3.85% yo-y. With the third-highest CAR of 21.85%, GTB is by far the most profitable bank, with an ROE of 29.3%.

Access Bank

Access Bank holds assets of N2.07trn ($12.6bn), having acquired Intercontinental Bank, in which the CBN had intervened, in 2011. Although it has in expanding its presence through acquisition, if it finds the right target and price is right,” Niyi Yusuf, the managing director of Accenture Nigeria, told OBG. “On the other hand, banks like Attijariwafa are only interested in entering greenfield.”

The second and largest bank to be sold, Mainstreet (formerly Afribank), with 201 branches and N330.2bn ($2bn) in assets in 2013, attracted 25 bids in May 2014. Skye Bank emerged victorious, with a bid estimated at around N120bn ($732m). While the sales of Enterprise and Mainstreet to Heritage and Skye, respectively, were finalised in early January 2015, the sale of the third – Keystone (formerly Bank PHB), which has assets of N307.5bn ($1.9bn) and 200 branches, and has been restructuring by downsizing its workforce in 2013 – is slated to take place in the second quarter of 2015, after the general elections in March.

Other recent sector developments include Nedbank, South Africa’s fourth largest bank, which converted its $285m convertible loan from 2011 into a 20% stake in Ecobank in October 2014.

Smaller Stakes

Several other transactions are also on the horizon. Private-equity group Actis, which invested $134m in Diamond Bank in 2007, is approaching the timeframe for divesting its 19.1% stake. Another one to watch is Union Bank, a 339-branch lender that was fifth largest by assets until it was recapitalised in 2011 with $750m from a consortium led by private-equity group Africa Capital Alliance. Union is to sell its non-bank subsidiaries in early 2015 and plans to raise up to N122.5bn ($747.3m) in Tier-2 bonds, having already sold a 9% stake to Atlas Mara, a fund controlled by the former CEO of Barclays, in early 2014.

There is also scope for further consolidation in a market that has traditionally benefitted from high interest rates. “Bank NIM earnings have benefitted from the recent high interest rate monetary regime,” Akinsowon Dawodu, chief operating officer and public sector head of Citibank Nigeria, told OBG. “As interest rates start to fall, as they inevitably must, there may be some potential for mergers and acquisitions in the market.”

Other sources of pressure on bank earnings have come as the new regulatory measures of the past year begin to bite. These have both curbed traditional sources of profitability – such as low-cost public sector deposits and high fees – and have prompted banks to expand their loan books (see analysis).

Reforms to payment systems have also affected profitability, including the switch from a T+3 to a T+2 cheque clearance system in 2013, which reduced the number of days it takes to clear a cheque from three to two. “The shift to T+2 in cheque truncation affected bank profits as well, since the float on clearing was reduced,” Accenture’s Yusuf told OBG. In September 2014, the CBN instituted a T+1 system, reducing cheque clearing times to one business day.

Cost Control

The average cost-to-income ratio in 2013 was 64.8%, according to Afrinvest – with a high of 89.2% for Union Bank and a low of 42.8% for GTB – which is far above those of emerging-market peers like Kenya (51%) or Ghana (60%). While electricity costs are usually named as the main culprit, personnel and IT infrastructure costs actually account for roughly 50% and 30% of the cost base, local bankers estimate.

According to HSBC’s September 2013 report on the top banks, while GTB has achieved the best cost control on staff, UBA and Zenith have made the greatest efforts to reduce costs in 2013, with the latter two to accrue estimated savings equivalent to 1% of total assets by end-2015. There are limits to how much banks can downsize, however. “Since the banking industry is one of the most attractive from a compensation standpoint in the country, any efficiency or rationalisation initiative in the industry is likely to have a significant impact,” Citibank’s Dawodu told OBG.

Sharing Is Caring

Important improvements are under way in pooling infrastructure. The CBN is piloting a drive for sharing services. Having barred banks from operating their own cash-in-transit services in June 2012, the CBN is moving ahead with a cloud-based IT system, called the National Financial System Network, with connections to its real-time gross settlement system, the Nigerian Inter-Bank Settlement System, and to payment processors SWIFT, Interswitch and Valuecard. “IT costs are the second-largest part of banks’ operating expenditure,” Accenture’s Yusuf told OBG, “but we estimate that they could save up to 30% on costs if they moved to infrastructure sharing.”

This is particularly pressing given the combined $900m banks spent on IT services in 2013 alone, according to CBN figures. There is also some debate over banks’ desire to improve their efficiency to levels seen in peer markets, beyond pooling back-end systems. “Banks’ cost-to-income ratios will only become a major competitive issue when there are no more opportunities for rent-seeking by banks,” Kehinde Lawanson told OBG. “We are not there yet.”

Financial Inclusion

Not only is the regulator curbing banks’ traditional profit centres; it is also encouraging greater intermediation. Launched in the autumn of 2012, the CBN’s financial inclusion strategy seeks to expand access to financial services to 70% of the population by 2020, and established a secretariat to help spearhead these efforts in 2014. The CBN’s inclusion strategy is a multi-faceted one, and focuses on reforming the microfinance sector, as well as establishing new branchless banking channels ranging from mobile to agency banking. The development of a data ecosystem to improve the financial “visibility” of customers is also part of the strategy (see analysis), Despite some growth, penetration remains low, with the number of bank accounts rising from 18.3m in 2008 to 28.6m in 2012 and 70.18m as of July 2014. Some 60% of savers do so through banks, compared to 33% through cooperatives and 26% through revolving savings-and-loans schemes like susu (an informal arrangement whereby members of a group pay fixed sums into a pool and then disburse funds to each member in rotation), according to a study by the Chartered Institute of Bankers published in April 2014.

While access to non-bank financial services remains low in the country, the number of credit-active accounts is even smaller. Most of the roughly 25m cards in circulation are direct debit and only a handful of banks – including Diamond, Ecobank and GTB – offer any credit cards. According to the credit bureau Credit Reference Company, as of end-2012 there were only 4m active loans to 3.7m customers – 3.2m individuals and 0.5m corporates. A mere N1.4trn ($8.5bn) of the thenN17.4trn ($106bn) in total credit to the private sector was consumer loans, all backed by collateral. Of this, three banks accounted for 58% of loans by number and 83% by value, while overdraft facilities made up 62% of personal loans and 70% of corporate ones.

Less Is More

To encourage financial inclusion for low-income and informal earners, the CBN relaxed its “know your customer” rules for low-value accounts. In February 2013 it unveiled three-tiered requirements on customer visibility for low-value (up to N200,000, or $1220), mid-value (up to N400,000, or $2440) and high-value (above N400,000) accounts. The first two carry no minimum balance, although low-value accounts that charge per use rather than per month are barred from international transfers. With retail-focused banks like Diamond and First Bank having launched such pared-down accounts, the CBN expects lenders to expand their reach beyond their branch presence.

Mircofinance

Despite a count of more than 820 microfinance banks (MFBs), these lenders account for only 2m borrowers and 2.8m depositors, according to recent figures from Mix Market, a microfinance data provider, which are based on MFBs’ annual disclosures. The vast majority of such institutions are in the heavily banked south-west and major urban centres, rather than where traditional bank coverage is the thinnest.

In 2011 the CBN reviewed its licensing rules, and issued new ones that segregate single-branch lenders from state-level and national MFBs, with respective capital requirements of N20m ($122,000), N100m ($610,000) and N2bn ($12.2m). Having delayed enforcement to end-2013, the CBN was liquidating 83 of these in 2014; meanwhile, up to 600 of the 800 MFBs failed to meet the recapitalisation deadline and are likely to seek opportunities to merge.

“Attracting deposits is always difficult for MFBs, and in an industry with such a troubled history, only the few institutions that are seen as credible are able to do so at reasonable rates,” Rotimi Oyekanmi, the chairman of RenMoney MFB, told OBG. “Moving forward, as the market stabilises we expect to have fewer and stronger MFBs, but this will be a result of mergers and acquisitions rather than liquidations.” In parallel with this, the CBN and Ministry of Finance are also steering a wholesale restructuring of Nigeria’s nascent mortgage lending segment (see analysis).

Branchless

Another major trend in the sector is expanding services beyond brick-and-mortar branches. Mobile banking has been a hot topic following the success of Safaricom’s M-PESA programme in Kenya – which now handles up to one-third of Kenya’s GDP in annual transaction volumes – though few subsequent mobile services have seen similar uptake elsewhere.

The CBN has licensed 21 mobile money service providers since rules setting their capital requirements at N500m ($3m) were issued in 2011. These consist of six banks and 15 non-banks; telecoms-led services are banned. Success in this arena has been limited: although some 70% of Nigerians own a SIM card and 44% have used a bank account (either their own or someone else’s), less than 1% have ever used a mobile money service and only 0.1% have set up a mobile wallet, according to Finclusion.

The use of mobile payments has nonetheless accelerated, with the number of transactions rising from 1.6m, worth N10.1bn ($61.6m), in August 2013 to 25m, worth N271bn ($1.7bn), as of May 2014, according to figures from the CBN. The regulator also issued rules for agency banking in February 2013, allowing banks to operate agents in-house and to partner with nonbank networks like the post office or retail shops in order to provide basic services to customers.

Crucially, the CBN requires all agents for both mobile and agency banking to serve several providers at once. This is intended to ensure adequate competition in the market, yet banks say that it actually creates disincentives for them to sign up more agents. While some bank-led mobile money providers claim several thousand agents, the absolute number is hard to estimate. “Counting the number of mobile money agents is tricky, as there is a lot of double counting of those serving two or more mobile money services,” Ashley Immanuel, programme officer at EFInA, told OBG.

Cash-Lite

 Alongside efforts to extend the reach of formal institutions, the CBN is also seeking to reduce the use of cash. The cost associated with cash use is high – typically 0.5-1% of GDP including minting and transport, reckons MasterCard. As a result, the central bank has piloted “cash-lite” schemes over the past two years, with a nationwide rollout from July 2014.

In the initial seven pilot states (including Lagos), which together account for 90% of cash centres, according to CBN, daily withdrawals have been capped at N500,000 ($3050) for individuals and N3m ($18,300) for corporates, while cheque cashing by a third party is capped at N150,000 ($915). Withdrawals above these limits are subject to penalties of 2-5%.

Such restrictions have helped drive a proliferation of non-cash transactions. According to the CBN, point-of-sale devices in the country rose by more than thirty-fold, from roughly 5000 in 2010 to 153,167 by April 2014. The monthly value of transactions processed on such devices rose in tandem, from N99.6m ($607,560) in January 2012 to N24bn ($146.4m) in April 2014.

The growth of online retailers like Jumia and Konga, both launched in 2012 (see Retail chapter), has also stimulated growth in non-cash activity: according to Accenture, the value of online payments rose swiftly from N62bn ($378m) in 2011 and is expected to reach N1trn ($6.1bn) by 2015. Many banks, particularly retail-focused ones like Access, GTB and First Bank, are also promoting e-banking and are pioneering pared-down branches – with security staff only – where customers can access their accounts via internet and ATM.

Corporate Finance

As competition in retail banking is apt to grow, so too is lenders’ exposure to larger corporate deals – especially in the oil and gas, power, and infrastructure-related sectors. Corporate loan syndication reached $13.5bn in 2013, close behind South Africa, and as of the end of 2014, total bank credit to the private sector stood at N18.15trn ($110.7bn), equivalent to around 20.4% of rebased 2014 GDP.

Corporate Deals

 “There is growing competition for larger corporate deals in Nigeria, with interest not only from European banks like BNP Paribas and the European Investment Bank, but also from Chinese and Middle Eastern banks,” Solape Hammond, CEO of Calag Capital, told OBG. Such lending covers many areas. Divestment of onshore and shallow-water blocks from international oil majors to indigenous independents has generated significant demand for debt financing, primarily through bank loans (see Energy chapter).

In the electricity sector, for example, more than 70% of the funds that were used for acquiring privatised power assets over the past year were financed by banks operating in Nigeria (see analysis). The CBN has also sought to support lending to priority sectors under the government’s Transformation Agenda 2011-15 through credit guarantee schemes – notably the N200bn ($1.2bn) Commercial Agricultural Credit Scheme (CACS).

Green Thumb

The CACS uses the proceeds from a three-year bond raised by the Debt Management Office to offer special loans of between five and seven years for target farming projects via participating banks. Originally launched in 2009 for larger operations, the scheme has since expanded access to smaller farms with net assets of at least N50m ($305,000), excluding land. As of February 2014, it had disbursed a total of around N228.2bn ($1.39bn) to 307 projects, about half of which were in agri-processing.

With demand rising for long-term financing – especially with respect to foreign-currency loans for resource and infrastructure projects – Nigerian banks are raising increasing sums of money from abroad. “Banks need dollars, and they have three main ways to get them in size: first, from development finance institutions; second, from syndicated loans; and finally, by tapping the eurobond market,” Samuel Sule, associate director of Capital Markets Africa at Standard Chartered in Lagos, told OBG. “We are seeing banks extend their debt tenor from one to three years for syndicated loans to around five years for eurobonds.”

Banks that have floated eurobonds since the start of 2013 include GTB ($400m), Diamond ($200m), Zenith ($500m), Access ($400m) and Fidelity ($300m), while Sterling ($200m) and Union (up to $750m in medium-term notes) are set to do so in 2015. Meanwhile, FCMB shelved its plans to issue a $300m eurobond, citing “unfavourable market” conditions, instead borrowing the sum from a group of international lenders at rate of 4% – below that of the eurobond.

While the response to such issuances has been strong from both foreign and local investors, Nigeria’s increasing reliance on international debt has also sparked some concerns in the market. “The growing exposure of banks to offshore loans, particularly through syndicated borrowing and eurobond issues, is a source of concern,” Lawanson told OBG. “Given the expected downward pressures on the naira this year, the currency mismatch at some banks could lead to greater pressure on their balance sheets.”

Banks’ net foreign liabilities have grown from 26.2% of core capital as of the end of 2011 to 69.5% by the end of 2013, according to the IMF, which recommended in its April 2014 Article IV Consultation “that the CBN closely monitor foreign exchange exposures and the adequacy of bank equity”. These market concerns were vindicated in late 2014, with the initial devaluation of the naira, from $1:N155 to $1:N168, and its further devaluation to $1:N198 in February 2015. This led First Bank and Access Bank’s seven-year eurobonds, both issued in June 2014, to trade at record lows.

Growth Abroad

Nigerian banks have expanded quickly throughout the region, starting in West Africa and moving increasingly into East Africa. The number of subsidiaries overseas rose from three in 2002 to 67 by end-2013, operating in 21 African jurisdictions, according to the IMF. The most geographically diverse of Nigerian-owned banks, UBA, which is active in 21 jurisdictions, booked 25% of its 2013 revenue from non-Nigerian operations in Africa, and aims to reach 50% by 2017. According to the IMF, in 2012 there were 15 African markets in which a Nigerian bank accounted for more than 10% of deposits or lending.

Outlook

 The industry stands at a watershed, with all major banks in good shape after the recent sanitisation. The average NPL ratio stands at 3.8%, and all CARs are well above the 10-15% thresholds. As banks increase exposure to large corporate deals at everslimmer margins, they are being prodded to expand their retail and SME loan books to offset drops in traditional revenue streams. The resolution of the last banking crisis, and likely arrival of new players, should boost competition and prompt lenders to develop the data ecosystems needed to tap the retail market. In this new, more competitive landscape, size will matter more. Smaller lenders will need to focus on more particular niches.