Nigerian Banks Will Evolve, More Capital Required!

Many second-tier banks in Nigeria will raise capital. Among other things, they need funds to cushion potential loan losses as the economy tanks due to myriads of things happening right now. The chief among those things is that manufacturing production output will drop since the cost of fuel will take some small players out of the game. This will trigger some loan defaults. Also, these second-tier banks will need funds to invest in tech.

Good People, expect some public offers / right issues later in the year as the season of AGMs begin where approvals would be sought and given. 

That said, Nigerian banking is solid: it continues to rain there. So, the new capital is not done out of panic, but a need to have better defense.

The floating of Naira is looking like a poison pill in the banking sector for second-tier banks, at least in the short-term. Yes, for banks with foreign currency denominated investments, they will see huge “profits”. But as that happens, with the re-positioning of the exchange rate, the second-tier banks could look “weaker”. To deal with that paralysis, many of those banks will need to raise new capital.

For investors who have joined the parties for the expectant huge dividends which are coming on profits, a critical thing to watch will be how these banks will approach the capital raise. Would they go super dilutive or otherwise? A non-dilutive raise certainly works better for investors.

That said, these banks will not be raising capital to the extent that ownerships will change hands. These raises will be marginal to a large extent. Some look small due to the valuation when examined in US dollar terms. Also, if the economy tanks due to many changes from fuel subsidy removal and the new FX regime, there could be risks of bad loans. So, more capital will be required to  cushion the effects by banks.

I expect a hybrid of public offer and right issue, as one of the playbooks to be explored by most banks. Nothing like Warren Buffett-Goldman Sachs model of 2018 great recession which happened a few days after the collapse of Lehman Brothers, is expected: give loads of cash with understanding that you cannot lose money irrespective of what happens in the market, and as that happens, you also get paid interest on that investment, even as you take equity!

FBN Holdings, the parent of First Bank of Nigeria, is going to raise more capital and will formally seek that approval in the next annual general meeting. Others will follow….

That the Rights Issue referred to in Resolution may be underwritten on such terms as may be determined by the Directors, subject to obtaining the approvals of the relevant regulatory authorities. That the shareholders, under Resolution, will waive their preemptive rights to any unsubscribed shares under the Rights Issue in the event of an under-subscription.?

That the Directors be authorized to appoint such professional parties and advisers and to perform all such other acts and do all such other things as may be necessary to give effect to the above resolutions, including without limitation, complying with the directives of any regulatory authority.?

That Clause 6 of the Memorandum of Association of the Company be amended to reflect the newly issued share capital of 22.435 billion by the creation of 8.974 billion Ordinary shares of 50 Kobo each”.?

“That the Directors’ fees for the financial year ending December 31, 2023, and for succeeding years, until reviewed by the Annual General Meeting, be fixed at N50 million for each Director and N63.7 million for the Board Chairman That the Company’s Issued Share Capital be increased from N17.948 billion made up of 35.895 billion Ordinary shares of 50 Kobo each to N22.434 billion by the creation of 8.974 billion Ordinary shares of 50 Kobo each”.?

Comment on Feed: What is loan loss?

My Response: If you have 10 companies which take loans from banks to run their operations. If due to energy costs, they reduce production or decide to shut down, those loans are now at risk since they cannot service them. Here, even the principal and interest could be lost. This is very likely as not many plants can absorb a 4x cost of fuel. In the simplest term, a loan loss is “a loss made by a bank when money it has lent is not paid back”

Update: US banks are on the same path already. Hopefully, our investment syndicate could participate very soon in injecting these funds, not just in Nigeria and Africa, but globally.

Federal regulators are seeking to reinforce and add to lending and capital rules on big banks and midsize lenders. The plan, made public on Thursday by the Federal Reserve, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, could stir debate around whether actively increasing public confidence in the stability of the nation’s financial system reduces the competitiveness (and profitability) of banks, Bloomberg writes. Medium-sized lenders such as Regions, KeyCorp and Huntington would have to increase their capital on hand by up to 16% on average, while the nation’s eight biggest banks would confront an increase of 19%. Wall Street has been girding for a tightening of capital rules for some time, both in response to evolving international standards and the recent banking crisis, per CNBC. Banks would have until 2028 to meet the proposed rule changes.

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