Nigerian equities which have lost 0.47 percent year to date (Oct 03) may see a further sell-off in the coming months on the back of impending implementation of Basel II capital requirements for banks.
“Implementation of Basel II and capital adequacy ratio will pare stock prices,” said Bismarck Rewane, CEO, Financial Derivatives Company (FDC) Limited, in an October 2 presentation.
“Capital raising activities of banks will increase supply of equities, leading to a further correction in equities market as primary market activities must come at a discount,” Rewane said.
Bank stocks account for 27 percent of total equity market capitalisation of N13.58 trillion. A 5 percent depression in banking equities will drag the market down by 1.5 percent, according to Rewane.
The Central Bank of Nigeria (CBN) published two circulars in December 2013 indicating that it expected banks to begin adopting elements of Basel II and III relating to market and operational risk by September 2014 when computing capital adequacy ratios (CAR).
The CBN also removed some assets which lenders can count as capital, while limiting Tier 2 capital to 33 percent of Tier I capital, according to an August 5 circular from the regulator.
The minimum capital requirements for lenders with operations outside the country were kept at 15 percent and at 10 percent for those with interests only in Nigeria.
Nigerian banks, in response, have begun accessing the capital markets to shore up their capital base.
Stanbic IBTC announced it was raising N30 billion in capital, while Diamond Bank has initiated a N50 billion rights issue.
Access Bank, another Tier-1 Nigerian lender, has also sought to boost its capital levels via a rights issue of N60-70 billion ($370-430 million), planned for the fourth quarter of 2014.
“We think Access Bank’s tier-1 raising decision may be a proactive step by management to bolster its core capital ratio under Basel II to give it more headroom to grow,” said Adesoji Solanke, SSA banking analyst at Renaissance Capital.
As at June 2014, ETI and FBNH had the lowest CAR among Tier 1 banks, of 16 percent and 17.6 percent, respectively, necessitating the ETI $200 million subordinated notes due in 2021 and FBNH $450 million Eurobond, according to Kayode Omosebi, an equity analyst with UBA Capital plc, a Lagos-based investment bank.
“However, with the new CBN guideline which capped the banks’ Tier II capital at 33.3 percent of total Tier I capital, the banks will be doing more of Tier I capital raise (equity) option, either by rights issue or special placement,” Omosebi said in a response to questions.
“We expect a few banks to access this space via rights issue in 2015 to issue about N50 billion on average, by our estimate,” he said.
The Nigerian Stock Exchange (NSE) Banking Index, which tracks the nation’s 10 biggest banks by market value, has lost -5.07 percent year to September 30, underperforming the -0.29 percent fall in the NSE All-Share Index.
The index has been dragged down by losses recorded this year in big cap bank stocks such as First Bank (-17.30 percent), Zenith Bank (-11.31 percent), and UBA (-25.28 percent).
Other lenders such as Stanbic IBTC, FCMB and GTB have, however, outperformed the index, with year-to-date gains of 63.93 percent, 22.22 percent, and 11.07 percent, respectively.
International standards set by the Basel Committee demand that banks meet minimum capital requirements, measured as a percentage of their assets. The amount of capital that must be held is linked to the riskiness of the assets.
