Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AfricaApril 6 2009

London bound / UK operations

Despite a global downturn, low oil prices and the weakness of the naira, the lure of a London base is still of vital importance to Nigerian banks wanting to establish an international presence. Nick Kochan reports
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Nigerian banks show no sign of losing their enthusiasm for setting up a base in London. UK operations have provided the launchpad for a global presence for a group of ambitious banks. No less than six institutions have obtained licences to operate in London, either as retail or wholesale operations, with another three applications for licences – from Platinum Habib, Oceanic Bank and First City Monument Bank (FCMB) – likely to be granted by the end of the year. There is also speculation that Diamond Bank is to join the list of Nigerian banks setting up base in the UK capital.

Wale Oyedeji, the managing director of Guarantee Trust Bank UK (GTB), says that London "provides the staging post for a Nigerian bank that wants an international presence".

The range of banking undertaken by Nigerian banks in London is wide. Nigerian retailing is best represented by First Bank of Nigeria, which offers the much acclaimed FirstSave account. UBA has entered the corporate finance sector, with the purchase of a large stake in AfrInvest, to create UBA Capital. Other banks offer insurance products and services for high-net-worth Nigerians. Many Nigerian banks have established trade finance operations as springboards to larger and more sophisticated banking operations.

Crisis concerns

For all the bullish talk, global conditions have hit the trade financiers. The fall in the naira and its recurrent volatility have put pressure on the financing of letters of credit. Second, Nigeria's economic weakness has hit budgets and volumes of imported goods. Andrew Martin, the chief executive of Zenith Bank UK, one of the leading Nigerian operations in London, says: "A lot of letters of credit are not being issued clean. The people are going to the Central Bank of Nigeria [CBN] and getting their dollars up front. That enables them to lock in at a rate so they are not exposed to future volatility. This occurs when they have to buy dollars at the end of the letter of credit.' Naira weakness has also damaged the Nigerian carry trade, which many banks exploited during an earlier period of currency stability and low naira interest rates.

Mr Martin says that this has hurt the bank's corner-stone letters of credit business. "The volatility of the naira has made dollar borrowings less attractive at this stage, but the way the CBN has moved in to control the naira should have a corrective effect to reduce the volatility going forward. We remain very bullish for the future."

Traditional trade financing business will see Nigerian banks remain in London through the downturn, says Marcus Hopkins, managing director of Intercontinental Bank UK. He says that banks take comfort from solid cash flows against a loan for future development financing. "There is a return to traditional source-of-repayment-driven finance. If you have a company willing to buy a cargo of oil on a monthly basis for a year, where you have known sources of cash flow, you can finance six, nine or 12-month money. This helps the company to buy goods that it needs to upgrade to work on projects," he adds.

Nigerian banks with a presence overseas can offer finance that is much longer term that the local Nigerian banks, whose time horizons are notoriously short.

This form of finance comes with a cost, both in time and expertise. Banks have to immerse themselves in the trade activity using specialist bankers and experts. Mr Hopkins contrasts such activity with the smoother funding of a capital market instrument. Nigerian banks, such as Guarantee Trust Bank, had some success in the Eurobond markets prior to the credit seizure in 2008. Mr Hopkins says: "Structured-term finance, pre-export finance, receivables financing, financing tied to specific identifiable business flows; these are all very safe and reliable structures to finance. When you're handling monthly shipments of transactions, there is a fair chance that everything will go wrong. So this is quite a specialist business and it lends itself to the more specialist financiers."

Trade finance entry

Recent arrivals to London have seen trade finance as a way of setting up stall. This business enables them to leverage the brands established in home markets. Mr Oyedeji says that GTB – a recent arrival, in May 2008 – does trade transactions, emanating out of west Africa. "We have a trade processing unit which processes transactions, we advise letters of credit, we do confirmations of letters of credit, we handle funds transfer activities, we have quite a number of Nigerian customers, and offer them banking services."

The importance of oil to the trade finance product cannot be overstated, says Mr Hopkins. He describes Nigeria as an "oil and gas" play. Indeed, he anticipates more gas production as the country tools up to capture gas waste products currently flared off in the oil production process. Banks can work with the oil production revenues to underpin loans to Nigerian counterparties. Mr Hopkins says: "Refineries around the world are very regular purchasers of Nigerian oil. They are willing to commit to a pricing mechanism for the coming 12 months. That gives the comfort that the oil will be delivered and the dollars received and we can build a financial structure around that. That will be the future for the bank."

The mechanism for such a financing arrangement is relatively straightforward. Mr Hopkins says: "There is a certainty of export of a certain amount of product, which gives rise to an obligation to pay. There is a performance risk on the company. In the middle is a bank which handles the flows so you can see the product exported and the money coming in. On the back of that you can finance 80% of a year's sales. [The oil companies] can go out and place an order for a bit of kit. This works equally well with gas."

Oil reliance

Oil price weakness has set back the country's ability to fund imports, placing pressure on trade finance operations of Nigerian banks. London-based heads of Nigerian banks argue that a rising oil price will inject new energy into the Nigerian economy and imports will quickly resume. Mr Martin says: "It will only take an up tick in the oil price to move Nigeria out of recession. The current problems are short term."

Mr Hopkins is more sanguine. He says: "You have to look beyond the markets' short-term problems. You have to adjust the tiller to handle the squalls, but keep in the same direction. Longer term, Nigeria will remain a major supplier of oil and increasingly a provider of gas. This will generate hard currency and the government will plough funds into the infrastructure. The impact of oil prices on Nigeria is significant but the country has a relatively small level of foreign debt relative to the country reserves, and the situation is manageable. Nigerian debt is 1.7% of gross domestic product, a remarkably low number. The currency and banking markets are under pressure. The state budget allocation for imports has declined and there is now a more restricted approach to imports."

Measures being taken by the Nigerian government to put a brake on imports present opportunities to Nigerian banks in London. Mr Hopkins says: "They have gone back to a system where the government is allocating dollars for imports. This is quite good for banks who process the transactions. The larger banks who are active in trade finance are the most sophisticated in getting available dollars from the government. That in turn makes it easier to finance the transactions."

Pull-out opportunity

The departure of large European and American banks from Africa's unpredictable markets is seen by some Nigerian bankers as an opportunity. Mr Martin says: "A number of large players have pulled out of the African market. ING is less active, Fortis is not really around any more. It is not yet clear how the takeover between Bank of America and Merrill Lynch will pan out. Whatever happens is likely to take out capacity, so it gives us more opportunities."

Mr Hopkins adds: "As the major banks that are most active in providing finance to emerging markets retrench, the domestic banks with international operations have the opportunity to provide specialist finance. We will be the conduit between the banks and export credit agencies and the multilaterals and those banks who are looking for diversification and are happy with product. For example, banks who traditionally finance the oil off-takers who look at structured trade transactions will partner with us and take some exposure. The big guys with large capital markets are not available at the moment. That creates a niche for banks like Intercontinental."

The London operation is perceived as a crucial piece in the jigsaw for a Nigerian bank's international footprint. This explains the interest in setting up such a base, and the resolution in maintaining it in tough times. As one London banker says, Nigerian banks have visionary leaders who want their bank to be a major player in Africa. Operations in London are central to that. These banks are looking beyond the current environment. Nigeria is an interesting longer term story.

Was this article helpful?

Thank you for your feedback!

Read more about:  Africa , Nigeria