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Forex gains boost Tier 1 banks’ market dominance

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Forex gains boost Tier 1 banks’ market dominance

Leveraging on their larger volume of foreign currency deposits, Tier 1 banks in Nigeria have benefited from the depreciation of the naira, booking exchange gains that have enabled them post  impressive profits and extend their dominance over their Tier-2 counterparts.  TONY CHUKWUNYEM writes

According to the Central Bank of Nigeria’s (CBN) Financial Stability Report (FSR) for the half year ended December 2016, the country’s five largest lenders (Tier 1 banks) maintained their dominance of activities in the banking industry in the second half of 2016.

The CBN classifies lenders into three groups: large or big banks, those with assets greater than or equal to N1 trillion; medium banks with assets greater than or equal to N500 billion but less than N1 trillion and small banks with assets of less than N500 billion.

The FSR for the half year ended December 2016, showed that the average Concentration Ratio of the five largest banks (CR5) with respect to deposits and assets stood at 53.70 and 53.68 per cent, respectively, at end-December 2016, compared with 43.3 and 51.9 per cent at end-June 2016.

It revealed that the market shares of the largest bank with respect to deposits and assets stood at 13.20 and 14.23 per cent, respectively.

Nineteen other banks, in comparison, had market shares ranging from 0.02 per cent to 6.19 per cent, in deposits, and 0.06 per cent to 6.23 per cent in assets.

Explaining that the concentration ratio of the banking industry was supported by the Herfindahl-Hirschman Index (HHI) for the industry at 773.21 and 774.50 for deposits and assets, at end-December 2016, compared with 764.13 and 757.00 at end-June 2016, respectively, the banking watchdog stated that this showed weakening of the competitiveness of the industry compared to the first half of 2016.

Bank divide gap to hit 70%

In fact, if projections made by Afrinvest West Africa Limited in its recently released 2017 Banking Report are anything to go by, the gap between Tier 1 and Tier 2 banks in terms of market share could further widen this year.

Currently, the Tier 1 banks are Guaranty Trust Bank Plc, Zenith Bank Plc, Access Bank Plc, United Bank for Africa Plc and FirstBank Nigeria Limited.

At a press briefing in Lagos recently, Chief Executive Officer of Afrinvest West Africa, Mr. Ike Chioke, noted that, in 2016/2017, the depreciation of the naira affected all banks by making their capital-adequacy ratio appear quite compressed.

He, however, pointed out that Tier-1 banks benefited from depreciation of the naira and that this has resulted in a widening of the market share gap between Tier-1 banks and Tier-2 banks.

The Afrinvest boss said: “The depreciation in the domestic currency resulted in higher risk weighted assets on the books of the banks. Hence, capital adequacy ratios of some banks fell towards threateningly low levels. Consequently, we expect such banks to approach the market in order to raise capital to shore up capital buffers.

“The bigger banks, typically the Tier-1 banks, that have more foreign currency deposits that are risk assets, have benefited from the depreciation and you see them booking exchange gains, thus, explaining the up-shoot in the profit numbers of the likes of GTB, Zenith Bank   Access Bank etc.

“So, we have seen this continuous widening of the gap between the Tier-1 and Tier-2 banks’ market share. Once upon a time, Tier-1 banks accounted for about 60 per cent to 65 per cent of the market share of the banking sector. In the universe of the 14 banks surveyed in the report, we saw that the percentage has risen to about 70 per cent. The Tier-1 banks have continued to grow often at the expense of the tier-2 banks.”

Lenders reap from FX liberalisation

Financial analysts had in the wake of the CBN’s establishment of a forex window for Investors and Exporters (I&E) on April 21, coupled with other measures introduced by the apex bank, especially its sustained interventions in the interbank forex market, began to predict improved performance  for lenders despite the continuing challenges they were having with bad loans.

Specifically, in a report in May, experts at Financial Derivatives Company Limited (FDC) predicted that increased availability of forex will result in more profit for banks.

They said: “Forex availability and price will boost profits… earnings will be on base year effects.”

Similarly, in a report released also in May, global credit rating agency, Fitch Ratings, stated: “The banks’ healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue last June.

The lenders also made higher US dollar core income (in naira terms) and booked sizeable foreign-currency (FC) trading income, which offset rising impairment charges.”

Indeed, data shows that most Tier 1 banks, which posted impressive profits in their 2017 half -year earnings, largely owed their success during the period to fresh foreign exchange liberalisation measures unveiled by the CBN.

For instance,  an analysis of the 2017 half year results of Zenith Bank, Access Bank and the United Bank of Africa (UBA)  reveals that the lenders raked in a combined sum of N148 billion from forex trading income, forex re-evaluation gains and foreign exchange derivatives.

Analysts particularly attribute improved forex availability to the CBN’s creation of the I&E forex window, which is widely acknowledged to have played a key role in restoring confidence to the system.

Commenting on the window at a recent event, Managing Director of Access Bank, Mr. Herbert Wigwe, said that it had helped to foster the timely execution of all eligible transactions, adding that this had led to increased supply of foreign exchange to the market, which had narrowed the spread between the official and parallel market rates as well as a decline in the inflation rate.

Flush with forex

Interestingly, as a result of return of confidence to the system, Tier 1 banks such as United Bank for Africa Plc, and Zenith Bank successfully issued $500 million Eurobonds.  In the same vein, Guaranty Trust Bank Plc launched an invitation to holders of its $400 million 6 per cent notes due 2018, to tender all or any of the notes in exchange for cash.

The bank said in statement that it was seeking through the offer, to deploy its available dollar liquidity to the repurchase of the notes ahead of the scheduled maturity in November 2018.

By contrast, small- and mid-sized lenders such as Wema Bank Plc abandoned plans to raise dollar loans and instead preferred to sell naira debt locally in smaller tranches.  Also, Unity Bank Plc, has been in talks with investors since last October, while Diamond Bank Plc announced last weekend that it had reached a deal to sell its West African units for 61 million euros.

In a recent note, Exotix Partners LLP analysts, Jumai Mohammed and Ronak Gadhia, said: “We view the Tier 2 banks as potentially challenged,” adding that the lenders seem unable: “to weather asset-quality deterioration storms.”

Commenting on whether their increasing dominance of the industry will lead to Tier-1 banks eventually acquiring Tier-2 lenders, resulting in a more consolidated industry,  Afrinvest CEO, Chioke,  said: “No. There must be specialization for everybody. The banking industry is growing and we have seen double-digit growth over all. It’s just that the Tier-1 banks are growing faster. So, it could be a Tier-2 bank that may see its business double.”

Besides, he said: “What would happen in the industry is that there would be areas of specialisation. Even in Afrinvest, there are certain transactions we would rather want a tier-2 bank to execute, because we know they are small and specialised in that area, and you can get decision faster. But there are other transactions, which may have wider implication for the country, or global linkages that works better for a tier 1 bank. So, you find space for each of the bank in their area of specialisation.

“But, a bank fundamentally needs to manage its balance sheet and if a bank is careless in terms of risk assets creation, this would have serious consequences,” Chioke said.

He also stated that while the banking industry was generally  sound: “ If you have more tier 2 banks that are challenged going down the same time, it might  bethe impact of a Systemically Important Bank.”

According to a report last weekend, a United States-based private equity firm, Milost Global Inc, is currently conducting due diligence on one of Nigerian banks in preparation for possible acquisition.

The study stated that  Capital Bank of Mongolia Ltd and Soyombo Insurance Ltd have  announced that they had executed a $255 million financing term sheet with Milost Global Inc.  It said that  Milost Bank Corporation, through its African subsidiary, Milost Bank Africa Limited, was  conducting a due diligence on a Nigeria bank that has over 250 branch operations, with a purpose of acquiring full control.

Although the identity of the financial institution was not disclosed, the company said their target was for a bank with over 250 branches across the country.

Last line

On the increasing dominance of the Tier 1 banks and what this portends for the industry, a financial analyst, Mr. Kennedy Ehigiator, argued that Mergers and Acquisitions (M&A) take place frequently in the  banking industry and so it should not come as a surprise  if one or two  small banks agree to merge  or be acquired by their bigger counterparts.

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