Nigerian banks are improving their corporate and investment banking capabilities but there is still some way to go, writes Stuart Theobald.

Corporate banking is the mainstay of the Nigerian banking industry. While the liability side of most banks’ balance sheets rests on consumer deposits, the lending activities of all of the banks rely on the corporate and commercial sector. Some Nigerian banks can provide fairly sophisticated investment banking, including capital raising and structured finance, but most commercial banking is vanilla trade finance, with banks still struggling to shed the bad habits that formed under successive military governments.

From the 1980s to late-1990s, the banks had the market to themselves and banking success depended on relationships with key powerbrokers. Easy money was made by exploiting economic weak spots such as the parallel exchange rate, which allowed banks to get fat through foreign exchange round-tripping that was technically illegal. Much corporate banking also disobeyed business logic, with the majority of small banks little more than piggy banks for their owners’ other business interests. While the banks have slowly been improving their commercial business capabilities, it is only with the massive overhaul of the industry in the past two years that Nigeria’s banks have a chance to build a sophisticated corporate and investment banking capacity.

Import business

Importing is almost synonymous with domestic Nigerian business. According to South Africa’s Standard Bank, Nigerians imported $18bn worth of goods in 2004, particularly manufactured goods, capital goods and chemicals. Even with Nigeria’s long history of agriculture (in 1960 cocoa was by far the biggest foreign exchange earner), 14% of Nigeria’s food was imported in 2004. The banks facilitate foreign exchange and provide letters of credit and bankers’ acceptances. Almost all of the banks have correspondent relationships with major European, American and South African banks as counterparties to trade deals. The banks also have a significant amount of their books in short-term lease finance and corporate overdrafts – relatively new services. Much other lending is for working capital finance, agricultural finance and invoice discounting.

However, corporate lending is short-term in nature – most banks will not lend on terms longer than three years with the majority at 90 days. The banks generally try to term match their balance sheets and deposits are almost entirely on call. The only medium-term funds the banks have, apart from their own capital, are lines from development finance institutions, which are usually provided on seven-year terms with no security requirements. The little longer-term finance that does exist is based on those lines. “There are thin margins when it comes to that kind of business,” says Atedo Peterside of IBTC Chartered Bank, Nigeria’s main domestic investment bank. Such lines are usually priced in foreign currency at Libor plus three percentage points. Because local banks are competing with foreign majors on large medium-term finance, pricing is low.

Add to this the fact that the banks are limited by Central Bank of Nigeria rules from concentrating more than 35% of their shareholders’ funds in any single exposure and it is clear that the capacity for major domestic finance is very thin. Although the new capital requirements brought in with the reform of the industry mean that there are now 25 banks each with $190m in capital, the largest bank can only finance up to $132m.

Lending capacity

That is progress, however, and the banks are hoping for a large expansion in their lending capacity. That will come from two sources: an expected second wave of consolidation in the industry as successful new-era banks take out the less successful, and wider economic reforms.

The pension fund reforms that are being implemented are forcing Nigerian employers to provide defined benefit pension schemes that will substantially increase the pool of long-term savings in the industry. Efforts to address the public sector’s mammoth unfunded pension fund liability – estimated at more than N2000bn ($15.7bn) – will also help the availability of investment capital. Some of the banks are setting up pension fund custodian companies to manage the expected boom in pension fund assets, which are expected to reach N300bn, according to United Bank for Africa (UBA).

The insurance industry is also being overhauled to improve risk management and increase capital that will create greater institutional savings. The government has been developing the domestic capital market through debt issues, most recently listing a five-year bond.

There is undoubtedly demand for major deals. The oil sector is the basis of most corporate banking yet local banks have not been part of the action when it comes to major project finance deals. “I don’t think Nigerian banks are doing 2% or 3% of the business in oil and gas,” says Afribank CEO Patrick Akinkuotu. Instead, the banks pick off the crumbs left by large foreign banks and tap into the downstream industry that rests on oil and gas. Much working capital finance goes to suppliers with confirmed orders from the oil majors. The same model has been applied to other multinationals operating in Nigeria.

Some skill transfer is happening; in the past few years some Nigerian banks have entered into large syndicated transactions with foreign partners. These have centred on the booming Nigerian cellular phone industry: both MTN and V-Mobile, two large Nigerian operators, have taken more than $100m in syndicated loans. Local banks have also arranged syndications for oil rigs and large industrial companies.

Large infrastructural projects remain the preserve of international banks, led by Citibank and Standard Chartered, whose local banks operate with their offshore head offices for big ticket deals. The signing of more deals of this nature is inevitable. Talk of large new infrastructure projects in the form of public-private partnerships (PPPs) has got the banks excited.

Major projects

The Lagos state government is pushing ahead with the Lekki Corridor project to build a new road linking the main islands of Lagos. It has the potential to be the largest PPP to date and to serve as a model for infrastructural development across the country. Given the poor state of most transport infrastructure and the resources now available from the oil revenues flowing into the central government’s coffers, the scope for such projects is clear. The government is also pushing for expanded power generation and distribution and more local oil refineries.

The government’s real hope is that the banks will move into gear to finance the development of the ‘real economy’, particularly mid-sized manufacturing. It is an ambition that is essential to the government’s overall economic plan and a key motive for the restructuring of the banking industry.

However, banks are often unwilling to stray from the low-risk terrain of multinationals and large Nigerian corporations. They rely on the multinationals’ first-world ethic when it comes to repayments and cash flow management – most banks claim that the default rate for loans to multinationals is zero.

“The key areas of the economy have not been addressed – the industrial sector, the agricultural sector, the bits that affect Nigerians day to day. Outside of the energy sector, there has been almost no lending”, says Afrinvest corporate finance head Ike Chioke, highlighting the source of major political frustration with banks.

All of the banks undertake varying degrees of commercial lending from commercial overdrafts through to trade finance. Lending to small business is less attractive to the banks, which tend to lump them in with their retail operations, despite government programmes to boost small business development.

At the more sophisticated end of the spectrum, the market is dominated by IBTC and the investment banking arms of First Bank, Union Bank, Afribank and UBA, as well as foreign-owned Citigroup, Standard Chartered and Stanbic Bank. The investment banking arms of other banks have varying levels of capacity and a handful of non-bank advisory firms also compete in the market. Until the recapitalisation process and the mergers that came with it, there was a raft of specialist corporate banks that have now merged with retail operations to become part of new universal banks. IBTC has acquired two retail banks but sees itself as remaining investment bank-led.

Significant growth

The capital market consists of the Nigerian Stock Exchange, which has 288 listed securities including companies, government bonds and some futures contracts. It has a $22bn market cap that turned over almost $2bn in 2005. All of the banks expect significant growth for investment banking. Last year was a watershed moment for the exchange with more than $3.2bn of new capital raised on the back of the bank recapitalisation programme.

The banks’ successful efforts will encourage other sectors of the economy to go to the capital market. Last year, the advisory capacity in many of the banks improved substantially, and some underwriting of new issues was achieved – although most issues were done on a best effort basis. The pension industry reforms will also boost the supply of capital. The prospects for equities are huge and that brings opportunities for asset management.

To date, the Nigerian mutual fund industry has been developing slowly. IBTC’s Nigerian Equity Fund, the largest with $100m in assets, delivered 27% dollar returns for the past eight years. Many of the banks are now setting up asset management arms with new mutual funds to be listed on the exchange.

Secondary market

Investment bankers also expect significant development in the debt market. The exchange lists a handful of government bonds, and one corporate convertible preference issue created last year by Access Bank. The banks are working on creating a secondary market for fixed-interest securities and believe more corporate debt issues will be done. They also talk about listing asset-backed securities but, considering retail mortgage and asset finance is almost non-existent, that level of development is some years down the road.

Privatisations are also a major opportunity for investment bankers acting for both government and potential buyers. As part of Nigeria’s economic reform programme, more than 1000 state-owned enterprises have been slated for privatisation. A number have already been completed but major deals have been frustratingly slow.

Critical ingredients

There are good grounds for optimism on the commercial front of the banking industry. Demand for finance is obvious and supply of funds to the banks is a likely future development. The critical ingredient is capacity and sophistication from commercial and investment banking. With longer term funding, the skills and capacity will have to be created for mid-sized finance to industrial concerns in the country.

Local banks will also have to develop their project finance and syndication skills for big ticket items. There are banks that have the ambition to do it – the policy and economic pieces just need to fall into place.

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