Mixed impact of JP Morgan’s decision on Nigerian banks

The announcement last week, by JP Morgan, one of the world’s leading investment bankers to delist Nigeria from its list of emerging market sovereign bond index has been surrounded with mixed reactions.

A critical look at the implications of JP Morgan’s decision for the banks shows that there may be short term rates on investment securities, which would lead to upward bias according to Renaissance Capital.

Key beneficiaries, given their balance sheet positioning should be GTBank, Zenith, UBA and Fidelity Bank. FBNH should also benefit. GTBank, Zenith, UBA and Fidelity have 18 percent, 16 percent, 21 percent and 22 percent of assets invested in securities, 96 percent, 71 percent, 50 percent and 78 percent of which are invested in T-Bills. FBNH had 20 percent of assets invested in securities in 1H15, 54 percent of which are T-Bills, a report by Renaissance Capital has revealed.

JP Morgan last week (September 8,2015),  announced that Nigeria will be phased out of the JP Morgan GBI-EM index – an EM debt benchmark that tracks local currency bonds issued by EM governments – over the next couple of months.

Nigeria was placed under on Index Watch in January following a series of administrative measures by the CBN that impeded the ability of foreign investors to access the FX market. After extending the Watch period in June, JP Morgan found that foreign investors who track the GBI-EM index continued to face challenges and uncertainty while transacting in the naira, due to the absence of a fully functional two-way FX market and limited transparency.

According to market sources, this will lead to an outflow of about $2bn of passive funds from Nigeria, as investors in the index seek to rebalance their bond portfolios. Nigeria’s weight in the GBI-EM index was 1.5 percent. FX reserves were at $31bn (30-day MA) on September7,2015 and are falling. Given the tight FX market, it is likely that the outflow of the $2bn may turn out to be protracted.

As Yvonne Mhango, Sub-Saharan Africa Economist at Renaissance Capital, mentioned in her report, an easing in FX restrictions appears unlikely near term. This implies that banks’ FX trading income remains under pressure in 2H15, which is negative for earnings. The bigger problem is that the real economy continues to struggle under the weight of these restrictions, which is potentially also significantly negative for asset quality in the banking sector. As these restrictions protract, the risk is heightened that we see banks revise cost of risk guidance upwards following release of 9M15 results.

“On the flip side, we expect to see mark to market losses coming through for banks, particularly those with proportionately higher investments in bonds given the upward bias in yields”, Adesoji Solanke, Sub-Saharan Africa Banking Analyst and Head of Research – Nigeria, . This hurts equity and puts additional pressure on Capital Adequacy Ratio (CAR). Based on 1H15 reported numbers, FBNH and Skye have the lowest capital ratios in the sector verses regulatory minimum of 15 percent and “we think they could see the most pressure. Skye has a capital raise in the works”.

HOPE MOSES-ASHIKE