• Saturday, July 13, 2024
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Regulation, assets, forex may trigger M&A in banking industry

Forex

Macroeconomic and regulatory challenges resulting in banks’s weak revenue and poor asset quality, among other factors, could trigger Mergers and Acquisitions (M&A) in the industry, BusinessDay investigations and interactions with operators indicate.

The imminent exercise which analysts say will affect the smaller banks, is particularly  occasioned by erosion of capital buffers and higher cost of funds as a result of disappearance of cheap funding sources, following some recent measures by the Central Bank of Nigeria (CBN).

Nigerian lenders are currently operating under credit risk environment occasioned by prolonged drop in oil prices, the phase out of Commission on Turnover (COT), implementation of Treasury Single Account and foreign exchange scarcity.

The analysts further say that profitability of the banks would also be hampered by the likely and eventual devaluation of the nation’s currency, the naira, since revenue from forex related transactions will be reduced.

The development is expected to reduce the number of existing banks and possibly impact negatively on the financial inclusion and cashless policies of the CBN.

Nigerian lenders are currently operating under a credit risk environment occasioned by prolonged drop in oil prices, partial phase out of Commission on Turnover (COT), implementation of Treasury Single Account and foreign exchange scarcity.

Lenders of Africa’s biggest oil producer have made a lot of loans to the oil and gas industry. With sharp and persistent drop in the price of crude, which has fallen to a low record of  below $30 per barrel from over $110 per barrel in 2014, analysts have raised concerns about banks’ ability to recover the loans given to the oil and gas sector of the economy.

Between 2010 and 2015, deposit money banks raised about $116.6 billion for local and international investors in oil and gas, including PHCN asset takeover.

The problems may be compounded by the declaration by the Asset Management Corporation of Nigeria (AMCON) that it would no longer purchase bad loans from banks, due to rising non-performing loans.

“The Nigerian banking sector is in a state of flux, making the near-to-medium term outlook very uncertain” Adesoji Solanke, banking analyst at Renaissance Capital, said, adding that most of the banks are now trading below historical P/B valuations.

According to Tajudeen Ibrahim, head of research, Chapel Hill Denham Securities Limited, the removal of CoT and the implementation of the Single Treasury Account policy of the government are unlikely to trigger M&As. Notably, the introduction of a maintenance fee of N1.00/Mille should partly offset the removal of CoT.

“Excessively weak risk asset quality and devaluation of the NGN against the USD are more likely to trigger M&A in the sector. Tier 3 banks appear more likely to be acquired in this regard”, he said in an emailed response to BusinessDay.

Ayodeji Ebo, head Investment reserch, Afrinvest  however said that the impact of the TSA implementation on banking sector liquidity has been softened by the harmonisation of the CRR to 20% as liquidity constraints hit the banking sector,  resulting in the MPC’s intervention.

Although Ebo says the CoT removal would not have an alarming impact on the banking sector, given the phased removal strategy employed about four years ago by the CBN, before its final removal in January 2016, he was quick to add that, “ M&As may not be an immediate option for top-tier players trying to consolidate operations and improve efficiency, but for the lower and mid-tier banks grappling with challenges ranging from macro-economic and regulatory headwinds, eroding capital buffers and higher cost of funds affecting assets quality and profitability.

“ M&A remain an open option to achieve lower cost of fund, increase geographical footprint, grow loan books and bolster net interest margin.”

According to Bola Agbola,  executive director  Cashcraft Asset Management limited, “The narrowing  of bank margins following COT removal ,TSA adoption , dwindling income from forex related transactions and imminent devaluation of the naira  will definitely hamper profitability and continued existence of the  lower sized banks and that should promote further consolidation of the industry, as size becomes a determinant of  survival,

“The implication is that some small sized banks may have  no alternative than to merge with bigger and more efficient banks, as the economy further shrinks due to reduced petro-dollar inflow.”

A report by Chapel Hill Denham Securities Limited revealed that the Nigerian banking sector will be dominated by six banks which will likely contribute 75.0 percent of the sector’s total assets.

FBNH, Zenith UBA and GTB are immediate top four in this regard ,while Access and Diamond are the other two banks the analysts believe will  make the list.

The six banks accounted for 62.8 percent of the total assets of the banking sector in full year 2014. “Nonetheless, we think Access and Diamond will require inorganic growth to make the list, due to the possibility of further consolidation among the tier two banks in the sector in the long term”, the analysts said in a report.

John Omachonu & HOPE MOSES-ASHIKE