Capital raising, M&A as hedge against banks going under

Analysts are all singing the same song of tougher year for the banking industry. They see the sector face margin compression pressure this year, occasioned by the final removal of Commission on Turnover (COT) and the Single Treasury Account, which is expected to wipe out at least 20 percent of revenues.

This combined with the slash in forex availability means that trade finance activity will nose dive. Therefore, it is imminent that banks might have to slash their workforce and compensation. This will become even more pressing because of the loan quality problems now plaguing the industry, according to Bismarck Rewane,  managing director/Chief Executive Officer of Financial Derivatives Company Limited.

However, analysts in the financial services sector have given deposit money banks the option of capital raising or mergers and acquisition to hedge against imminent closure.

Ike Chioke, managing director/CEO of Afrinvest (West Africa) Limited said, “I think the banks would have a tougher year this year, I do think that those who have capacity to raise funds should raise more capital, not just to prevent themselves from going under, but to have the capacity to weather the shock”. He said those that do not have the capacity to raise capital can consider Mergers and Acquisitions.

But Rewane said attempts to recapitalize will be difficult and futile because of the slump in share prices of banks. Therefore, this will be a tough year for banks.

Responding to questions at the unveiling of the Nigerian economy and financial market: 2015 review and 2016 outlook themed, “darkest before dawn, Chioke said, “when the economy does well, banks can collect a higher toll. When the economy did not do well, the toll trickles. You also see that a number of factors in the banking sector have changed Nigeria’s fiscal and monetary policy responses to the weaker oil price environment have only served to exacerbate the cloud of investor uncertainty, thus, amplifying the financial market rout”.

Chioke likened the situation to a business man that built a $10 million factory and immediately after, a policy came up, banning 41 items among which are his raw materials. These are some of the dis-incentives of people making long-term investments in Nigeria.

According to him, between the first quarter and second quarter of this year, you will see some downsizing, reorganizations and restructuring. “Because if they don’t, it will be much more difficult for them to end the year more profitably.”

However, Rewane believes that there will be a rejuvenation of the cashless policy which will lead to new efficiencies in the payment and settlement space.

HOPE MOSES-ASHIKE