Bearish markets test banks’ plans for rights issues

Nigerian lenders who announced plans to raise billions of naira in new capital via rights issues, are waking up to equity markets that have sold off by 18 percent in four months.

Stock valuations at the lowest levels since early 2013 make it harder for lenders to raise funds through common equity, which dilutes existing shareholdings.

This is clouding the outlook for such rights issues, although analysts say most are on course for now.

“For Access at least, all public communication so far suggests that the issue will still commence. We’ll have to see what happens by the time the offer opens. The share price‎ is a moving figure and what’s really important is where it’s at when the issue kicks off, said Adesoji Solanke, SSA Banking Analyst at Renaissance Capital, in a response to questions.

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“For UBA, their sole release so far, stated that the regulatory approval process is underway. Subsequent to this, we haven’t come across any additional updates.”

Nigerian equities which recently flirted with bear market territory, have lost N1.7 trillion in market capitalisation since October 10, data compiled by BusinessDay show.

The NSE banking index, tracking the nation’s 10 biggest banks by market value, has lost 18.25 percent this year to Nov 12 compared with a 14.39 percent slide in the main all share index.

Skittish investors are selling stocks, unwilling to be caught up in currency related losses, as the naira slumps on oil price weakness.

The currency was trading down 0.30 percent at N171.58 by 4:10 p.m. in Lagos on Friday, down for a fifth day.

Brent futures gained 0.4 percent to $78.20 at 11:01 a.m. in London. Brent oil is down some 28 percent since June this year.

“Nigeria’s exposure to fluctuations in crude price, coupled with concerns over foreign exchange stability and the fear of a naira devaluation, are key factors responsible for the recent downward trajectory in the equities market, leading to the biggest month-to-date and quarter-to-date loss of 9.54 percent and 17.57 percent,” said Abiodun Keripe, head, research and strategy, at Elixir Investments.

“The concern for banks that are raising equity capital via right issue, is if existing investors will decide to pick-up their rights in the face of a prolonged bear market,” Keripe said.

A transition to Basel requirements mandated by the CBN is pushing the banks to boost capital via rights issues.

“With the new CBN guideline which capped the bank’s 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,” Kayode Omosebi, an equity analyst with UBA Capital Plc, a Lagos-based investment bank, told BusinessDay.

Banks with international operations are required by the CBN to meet a minimum capital adequacy ratio (CAR) of 15 percent, while it is 10 percent for those with strictly Nigerian operations.

Stanbic IBTC has announced it is raising N30 bn in capital; Access Bank has initiated a N68 billion rights issue, while UBA’s proposed share sale will be on the basis of One (1) new Ordinary share for every Ten (10) Ordinary shares.

Access Bank planned to open its proposed rights issue at N8.90 kobo per share, eventually issuing 7.640 million ordinary shares of 50 kobo each

Access Bank stock price closed at N7.68 per share on Friday.

Lenders may still find takers for their proposed equity sales, even though most rights issue prices are currently above market prices, say Meristem securities analysts.

“Some of the issuer banks have underwritten their rights which may presuppose they have identified specific institutional investors that may not be able to acquire the volumes on sale in the market and so are willing to pay a premium,” Meristem said.

PATRICK ATUANYA