Diamond, FCMB open doors for capital raising in banking sector

Nigeria’s tier two lenders, Diamond Bank and FCMB have opened doors for fresh capital raising among Nigerian banks to maintain their balance sheet. The two banks target retail investors for the offering and selling some assets to enhance capital.

Analysts see the move as one that would enhance competition in the industry and build confidence among investors, shareholder as well as consumers.

The analysts told BusinessDay last night that these banks would be successful in their capital raising efforts as a result of the recent foreign exchange liberalisation by the Central Bank of Nigeria (CBN).

Razia Khan, managing director, chief economist, Africa Global Research, Standard Chartered Bank, London, said following the FX liberalisation and a weaker naira, concern over banks’ capital adequacy had become more pervasive. Capital is measured in naira, but many assets are in dollar. A weaker naira meant lower levels of capital. From this perspective, the proposed capital raising by banks is positive, as it helps to settle any fears early on.

“The more liberalised FX regime in Nigeria also means that banks are likely to be more successful in their capital raising efforts. Nigeria is still seen as a strong long-term growth prospect, with its banks well placed to benefit from that growth,” Khan said in an emailed response to BusinessDay.

The CBN had on July 27, 2016 issued a directive to all deposit money banks to ensure that the unprovisioned foreign currency-denominated loans were fully provided for immediately in the income statements and evidence of the additional provisions forwarded to the director of banking supervision within one week.

Meanwhile, the apex bank shored up mid-tier lender Skye Bank last month with a loan after it replaced its management when its capital fell below levels required by regulators. Consequently, the CBN has been encouraging the public not to panic about the banking system, saying they are strong and healthy.

“Some banks may have to raise capital due to the impact of naira devaluation on their foreign currency denominated loans and broadly weak risk asset quality. Raising capital in the current environment may, however, be challenging on weak equity market (for tier 1) and high interest rates (for tier 2),” Tajudeen Ibrahim, head of research at Chapel Hill Denham Securities Limited, said in an emailed response to BusinessDay.

Uzoma Dozie, group managing director, Diamond Bank, said “the bank’s capital plan will ensure it meets all regulatory requirements both in the short term and in the future.” Diamond Bank’s capital adequacy ratio had fallen to 15.6 percent of assets by mid-year from 18.6 percent a year ago.

Ladi Balogun, CEO of FCMB, was quoted by Reuters as saying the bank’s capital adequacy ratio was close to the regulatory limit of 15 percent of assets at mid-year, and that it was undertaking the capital raising to provide an additional cushion.

“The bank was also slowing down loan growth, adding that a rate of increase of 14.8 percent in the first half was largely due to the 40 percent drop in the value of the naira against the dollar since the dollar exchange rate peg was removed in June. Otherwise, loans declined by 1.9 percent,” said Balogun, whose term as CEO ends next year.

“For the Tier II, we would be looking at anywhere in the range of N10 billion to N15 billion. It is really going to be targeted at retail because we feel that the rates from institutions will be high,” he told an analysts’ conference call.