Talk of Nigeria’s banking sector today is dominated by the challenges facing lenders at home. With a growing dollar liquidity crisis, depressed oil prices and sluggish economic growth, the country’s banks are in a tough spot. But, beyond the domestic market, Nigeria’s lenders are facing new challenges – as well as some opportunities – in their continuing story of regional expansion. Today, Nigeria’s largest banks boast a footprint across parts of western, eastern and central Africa.
While this growth offered significant upside potential during the years of the commodity boom, the outlook today is less certain. Across the continent, the near-term prospects for economic growth have dimmed as currency volatility and falling commodity prices have prevailed. These trends have emerged as regulators in a number of key markets are ramping up their capital requirements for banks. As a result, the prospects for Nigerian banks’ subsidiaries across Africa are changing.
In response, some lenders appear to be moderating their regional expansion plans as they withdraw from existing positions. Others are maintaining a slower and more cautious approach to regional growth. What is clear is that the days of Nigerian banks acquiring significant positions across Africa on a meaningful scale are very much on hold. While this trend is far from problematic for most Nigerian banks, given the small contribution of these subsidiary units to their overall performance, it is likely to have implications for the banking markets in which these units operate.
Regional ambitions
Nigeria’s lenders first began to expand in 2004, following a tenfold increase in minimum capital requirements that led to the consolidation of the domestic market. “The banks used that increased capital to expand across the continent,” says Adesoji Solanke, sub-Saharan banking analyst at Renaissance Capital in Lagos.
Backed by a booming domestic economy, favourable oil prices and the ambitions of the country’s larger corporate groups, many of which were investing across the continent, the rationale for expansion was strong. According to research from the Bank for International Settlements, this led to more than half of the country’s domestically owned banks owning units or subsidiaries outside Nigeria by 2008. This figure compares with just two lenders with foreign subsidiaries in 2002.
During this period and in subsequent years, much of this expansion has been non-organic as the banks have pursued existing in-country operations of local lenders. For most, opportunities in west Africa have offered the most attractive acquisition targets. Proximity to the home market is one reason for this, as is the common linguistic and regulatory norms on offer in most of these jurisdictions.
“The further Nigerian lenders expand away from west Africa, the harder it is for them. There would be less of an incentive to maintain subsidiaries beyond this region if the outlook for subsidiaries outside west Africa deteriorated,” says Akin Majekodunmi, a vice-president and senior analyst with ratings agency Moody’s.
Growth opportunities
Nevertheless, a number of Nigerian banks have decided to pursue growth opportunities further afield. In particular, east and central Africa has been a focal point for Nigerian banks looking to tap into the region’s favourable demographics and economic growth. For instance, First Bank of Nigeria, United Bank for Africa and Access Bank, Nigeria’s first, third and fifth largest lenders by total assets, respectively, have all established a presence in the Democratic Republic of the Congo (DRC).
For First Bank, the DRC represented its first investment into a fully fledged African subsidiary. “We were looking for a solid investment opportunity in a local lender. In 2011, we had the chance to acquire Banque International de Credit Congo. Aiding this decision was the fact that the country is very similar to Nigeria in terms of opportunities as it has a large and growing population with abundant resources,” says Bashirat Odunewu, group executive of First Bank’s international banking group.
Following this deal, in November 2013 First Bank announced the acquisition of International Commercial Bank’s subsidiaries in Gambia, Ghana, Guinea and Sierra Leone. “For us, these countries have different business focuses. Some of them are agriculturally focused, while in the [DRC] we are working on a lot of infrastructure development. We need to consider the strengths of each market and the ways in which the bank can maximise our returns while helping the economy to grow,” says Ms Odunewu.
Scaling back
Yet, more recently, a number of Nigerian lenders have reduced their presence across the continent. In particular, Access Bank has led the way in terms of drawing down its equity position in some subsidiary units, while executing a full withdrawal from other markets.
In January 2014, the lender announced the sale of its loss-making unit in Côte d'Ivoire to Cameroon’s Afriland First Bank Group. In the same year, it divested its subsidiary in Burundi, FinBank. These withdrawals emerged as nationalised lender Keystone Bank, under the management of 'bad bank' the Asset Management Corporation of Nigeria, sold its stake in Uganda’s Orient Bank in 2015. Keystone Bank also intends to divest its positions in Sierra Leone and Liberia.
The mixed fortunes of Nigeria’s lenders abroad have much to do with the difficult economic environment across the region. “There are so many challenges now in sub-Saharan Africa that a lot of banks are not generating the kind of profits that they had anticipated outside Nigeria. Given the difficulties at home, many of them are now focusing on the domestic market,” says Mr Majekodunmi.
Guaranty Trust Bank, the country’s fourth largest lender by total assets, posted a loss on its operations in Côte d'Ivoire to the year ending September 30, 2015, although its remaining five African units were profitable. Meanwhile, Access Bank recorded losses in its subsidiaries in Sierra Leone, Gambia and Zambia over the same period, though its operations in Rwanda, the DRC and Ghana all posted positive returns. As such, questions remain over the extent to which Nigerian lenders are willing to back their loss-making subsidiaries across the continent while conditions at home remain increasingly difficult.
In conjunction with a more challenging economic landscape, rising capital requirements across the region pose another obstacle. “Regulators across the continent are increasing capital requirements for banks, whether it is across the board or specifically for the international banks operating in a particular jurisdiction. This could be a constraint for the Nigerian banks that do not have the capital to inject into those countries,” says Mr Solanke.
Leaving a hole?
Beyond the implications for the banks, the exodus of lenders from some markets may prove challenging for their respective financial sectors. Though Nigerian banks’ operations in many countries remain relatively small, a number of these markets are yet to reach the requisite scale or maturity required to handle sudden shocks. This is particularly true in the case of the DRC.
“Any move by Nigerian banks to offload, downscale or close foreign operations, such as those in the DRC, in response to changes in home market capital requirements, could have sizeable disruptive effects within the Congolese banking sector. While I do not think this would pose a systemic risk to the wider sector, care needs to be taken to manage any potential disruption,” a senior banker in the DRC told The Banker.
“Some banks are pricing risk aggressively, and lending at durations that are hard to justify in the context of the local economy, in order to build market share. Clients face significant refinancing risk in the event that Nigerian banks retreat, as the broader sector may not refinance at similar rates or durations,” the source added.
The coming years will be a solid test for the performance of Nigerian banks’ subsidiary units across the continent. As the problems pile up at home, the prospect of further divestments from some lenders remains high. For others, a more cautious approach to regional expansion, characterised by the consolidation of existing positions, appears to be on the cards.
“We want to concentrate on our existing acquisitions for now. If promising opportunities come along it doesn’t mean that we will ignore them but our priority is to maximise our current investments,” says Ms Odunewu.
