The return of Nigerian banks to the international bond market is a step towards reducing maturity mismatches between foreign-currency assets and liabilities, Fitch Ratings says.
“This is credit positive as it lessens foreign currency liquidity risk, but the impact will be modest as the new bond issuances are small relative to total term dollar lending.”
Nigerian banks are infrequent issuers on the international capital markets, but three leading banks with deposit market shares near or above 10 percent have issued medium-term Eurobonds since fourth-quarter (Q4) 2016 (Zenith Bank: $500 million; United Bank for Africa: $500 million; Access Bank: $300 million).
This week, Fidelity Bank, a smaller bank with a five percent deposit share, issued $400 million. Fitch says more banks may follow. Sources of longer-term foreign currency funding are limited for Nigerian banks and Fitch estimate that foreign currency funding equates to less than half of dollar loans. Outstanding bonds issued by banks totalled $4 billion at end-June 2017, the bulk of which is in Eurobonds.
Renewed interest from international investors seeking yield has enabled several banks to issue Eurobonds since late 2016, for the first time since 2014, albeit at higher yields following rating downgrades in the intervening period. In most cases, the issuance will boost FC funding rather than simply refinance maturing dollar debt.
Nigerian banks have traditionally operated with significant maturity gaps, funding longer-term loans with short-term customer deposits, as is the case in many emerging markets. For foreign currency liquidity, there are no prudential limits in place.
The Central Bank of Nigeria’s regulatory liquidity ratio (requiring banks to hold liquid assets equivalent to 30 percent of total deposits) is focused exclusively on naira liquidity. There are regulatory limits to control open foreign currency positions in banking and trading books, but these target the management of market risk and its potential impact on banks’ capital rather than liquidity risk.
The term of bank lending has gradually lengthened since 2012 when Nigeria opened up opportunities for investment in the oil sector. We estimate that about half of all bank loans are medium-term with maturities of three to four years. These are largely in foreign currencies.
This is a high share for a low-rated market where banks have limited access to longer-term foreign currency funding. Foreign currency term loans underwent considerable restructuring last year and this year, particularly among oil-related borrowers facing cash flow constraints given weak oil prices and disruptions in production. The devaluation of the naira in mid-2016 also caused debt servicing problems as borrowers reliant on naira revenue streams struggled to find additional funds to repay rising dollar obligations. Loan restructuring typically involves a two- to three-year maturity extension, pushing out final maturities to 2019 and beyond.
Iheanyi Nwachukwu
