The number of players in Nigeria’s banking sector is falling again as a desire to maintain a top 10 listing, as well as a nationwide presence, pushes a new wave of mergers, writes Nick Kochan.
Nigeria’s banks are undergoing a new wave of consolidation. Two banks have merged in the past few months, and the total number has fallen from 25 to 23.
This second wave of consolidation was expected, but not so soon after the first between 2004 and 2006. However, there is a crucial difference between the first wave and the most recent. Government regulation and intervention brought about the first, following the Central Bank’s decision to enforce a minimum capital requirement.
The second wave is being driven by banks, which have decided their long-term prospects are better served by combining than by going it alone.
Elizabeth Ebi, the chair of FutureView, a leading issuing house and adviser to top Nigerian banks, says: “Everybody wants to be in the top 10. So when one bank realises that someone else is getting into the top 10 and they will not, they will merge to make sure they get there. They will have to come to some understanding through partnerships. Nobody wants to be left behind.”
Foreign input
Foreign banks are at the hub of the new merger wave. Ecobank Nigeria (a regional bank based in Lome, whose parent Ecobank Transnational is listed in Lagos) has merged with Unity Bank, itself an amalgam of nine banks created in the earlier restructuring. The merger of Stanbic and IBTC-Chartered has long been mooted and negotiated over and had received central bank and stock exchange approval.
The contraction of the sector will not stop here. Nigeria’s bankers are convinced the second wave is only now gathering speed and a lot more banks will be swallowed.
“We will see 10 banks surviving in 10 years’ time,” says Aigboje Aig-Imoukhuede, managing director of Access Bank. “The reduction will happen naturally. The market will become too competitive. People will elect not to compete.”
The expansion of networks is the key to this expansion, says Christian Udechukwu, managing director of Business in Africa Events. “The banks have gone into the next stage of consolidation. Banks that do not have a good nationwide spread are being forced to combine resources.”
Regional expansion is another priority for Nigeria’s banks. Less developed local markets present easy pickings for the newly confident and better capitalised Nigerian brigade. Mr Udechukwu says: “They have become the predominant regional players in west Africa. They are far ahead of the competition.”
Many banks are exploring opportunities in east Africa and central Africa. Mr Udechukwu adds: “southern Africa will be the last match. Breaking in there will require more skills, more capital and more technology.”
Top 100 ambitions
Pressure for this expansion is coming from the Central Bank of Nigeria, which is encouraging banks’ acquisition of skills. It also wants to “raise their global vision to ensure they come within the top 100 global banks in the next 10 years”, says one local banker.
The Central Bank is encouraging strategic alliances for activities such as asset management. Local banks have formed strategic partnerships with 15 global investment banks to manage Nigeria’s $43bn-worth of sovereign assets.
Arguably it is not too soon to start talking about the globalisation of Nigerian banking. Many local banks have already opened offices in London, or are set to open up shop shortly, including Zenith Bank, First Bank, UBA, GT Bank and Oceanic Bank. The march onto the international stage has begun in earnest.
Custody competition
Another area where banks are prospecting further is in the custody market. Four banks have new custody offerings under preparation. First Bank, the country’s largest bank, has already thrown its hat in the ring. The challenge to the monopoly of Stanbic, the historic custodian for Nigeria, is truly under way.
International custodians are also believed to be prospecting the market, and one is thought to be talking to local regulators. Alex Trotter, an analyst with Afrinvest, a local investor, says international investors are awaiting the entry of a major custody player into the sector.
“We are looking for a big player like Bank of New York to come to Nigeria. The market needs someone who can compete and bring down the wide cost of transactions. Capital is abundant, but we need something that will enhance the friction relating to transactions. That will occur in due course,” he says.
Local banks set to offer custody include Oceanic, UBA and First City Monument Bank (FCMB). Malcolm Gilroy, the chief operating officer of UBA Global Markets, says: “We expect to take on international accounts and sub-custodian mandates by September.”
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Ladipupo Balogun, managing director of FCMB, says: “All international investors with Nigerian assets must have a local custodian. The Nigerian Securities and Exchange Commission is going to change the laws, and stockbrokers will be required to have separate custody accounts. This will ensure that they don’t abuse the funds. |
“We expect at least four banks to set up custody businesses. Our focus will be on attracting the assets of the captive customers we have through our stock-broking and asset management business.”
Reform of pension, banking, capital markets and insurance sectors, prompted by the government of former president Olusegun Obasanjo, has stimulated greater liquidity in the financial sector. Rapid annual gross domestic product (GDP) growth – estimated at between 7% and 8% – puts further pressure on capital markets to fund infrastructural development. Capital markets are encouraged by the stance of the new president, says FutureView’s Ms Ebi: “The government is trying to provide the environment where business can run effectively.”
Capital market products
Institutional players have sought to absorb the new liquidity with the creation of a wide range of capital market products. These include exchange-traded funds (ETFs) and some derivative products linked to property.
Farooq Oreagba, head of strategy at the Nigerian Stock Exchange, says that JPMorgan, Renaissance Capital, Rand Merchant Bank and Deutsche Bank have discussed setting up or participating in Nigerian ETFs.
The Nigerian Stock Exchange has also produced a set of rules for the establishment of closed-end funds. Mr Oreagba says: “We are looking to list a structured real estate fund, which will have downside protection with embedded upside options. A private placement of N5bn [$39.2m] was successful and we are going to try and list it on the exchange. We want the guys who took it up to realise some value. Once that gets going, more and more will come along.”
The exchange is currently preparing to launch an index of the 40 Nigerian stocks, whose greatest component is the banking sector.
Many of the new instruments are linked to property and mortgages, where investment has lagged. This is prompting the creation of real estate investment trusts (Reits).
The first Reit has just been listed on the exchange, and Mr Oreagba says that many more are in the pipeline. It is understood that the International Finance Corporation is considering launching a Reit.
Activity in the local bond markets has been driven by the needs of local banks to raise money to meet a new set of capital regulations. Nigeria’s Central Bank imposed a minimum capital requirement of $25m in 2004, and many banks have gone on a capital raising spree to boost their Tier 1 capital. Money has also been needed to acquire and absorb the multitude of tiny banks that were on the verge of closure. The number of banks has collapsed from 100 to 23 as a result of the new capital requirements.
Regulatory changes have helped bond markets to handle new fund-raising requirements. Since June 2006, dealers in bonds have been required to make a market in all bonds. Mr Gilroy says that bonds worth N500bn have been issued on the exchange over the course of the past year and many have been bought by international investors.
The success of a bond issued by UBA indicates the strength of the market, he says. This was a N100bn mortgage-backed security with a five-year term, where the first tranche was bought at 75 basis points over government treasuries.
The bond was sold with a yield of 9.98% but trade in the secondary market was brisk, and the yield currently stands at 9.75%. Mr Gilroy says that the buyers are banks, pension funds and hedge funds.
Mortgage sector
The need for investment in housing will prompt many such issues, says Mr Gilroy. He expects Nigeria’s state government to set up mortgage banks, such as the German landesbanken (savings banks), to issue bonds aimed at financing development. Lack of credit checking systems restrains the development of the country’s mortgage sector, although this is expected to be rectified when a credit checking bureau is established in 2008.
Banking borrowing continues to grow at a fast pace, says Ms Ebi, but she expects it to move forward through increasingly complex structures. “Banks are looking at second-tier fund-raising as opposed to straight equity. They will be looking at split bonds, convertibles and more esoteric structures. They will also be looking further at the international markets.”
Mr Balogun says: “Organisations are looking for hybrid debt. We are developing capabilities and taking principal positions. We are looking for opportunities for real estate developers, where we provide subordinated debt which can be convertible.”
