Joy Onyemaechi examines the performance of five money deposit banks (MDBs) that engaged in capital raising in 2014 and concludes that the decision to enhance their capital base yielded, and still yielding, the desired result
From all indications, 2014 was a very challenging year for most Nigerian businesses. The economic challenges facing the country left the companies in urgent need for more funds. The Central Bank of Nigeria (CBN) was more rigid in its regulation of the banks in 2014 as it continued to tighten the monetary policy.
CBN earlier last year released a guideline on Nigerian banks transition to Basel ii/iii. The banks were given a six months period to June 2014 during which they were to compute their Capital Adequacy Ratio (CARs). The deadline was later moved to September 2014 to give more times for the banks to prepare themselves.
Basel ii is an International Business standard that requires financial institutions to maintain enough cash reserve to cover the risk incurred by operators. The Basel ii accords are a series of recommendations on banking laws and regulations issued by the Basel committee on banking supervision.
The CBN increased the Cash Reserve Ratio for public and private sector deposits to 75 and 20 per cent respectively, mandatory payment of a minimum of 30 per cent MPR rate on savings deposits attaching a risk weight of 125 per cent to oil and gas exposure of banks with 20 per cent more on its portfolio in oil and gas.
Large commercial banks mostly tier 1 banks with international operations are required to have a minimum Capital Adequacy Ratio (CAR) of 15 per cent while banks classified as systematically important banks are required to have 16 per cent CAR. Nigerian banking industry would be adopting Basel ii capital accord in October 2015. Last year, CBN certified First Bank, UBA, Zenith Bank, Access Bank, Eco-Bank, GTB, Skye Bank and Diamond Bank as systematically important banks.
In order to beef up their capital base to meet with the requirements of CBN and also improve their operations, some of the banks decided to raise capital through rights issues and private placements while others issued Eurobonds. In 2014 a total of N69.20 billion was raised through of rights issues of 46.45 billion shares by two banks. Unity Bank offered for subscription 38.447 billion shares: to its existing share holders and raised additional capital of N19.20 billion. Diamond Bank raised N50.40 billion in 2014 through rights issue of 8 billion shares. Unity Bank also raised N20 billion through private placement of 40 billion shares.
Four banks raised capital amounting to $1.45 billion via Eurobonds. Zenith Bank in April 2014 issued Eurobond worth $500 million with a coupon rate of 6.25 per cent. The proceeds were used to finance the power sector as well as the oil and gas projects. In May, Diamond Bank issued Eurobond worth $200 million. Access Bank in June raised $400 million via euro bonds and first bank issued euro bond worth $450 million.
The capital raised by the banks was used to boost the capital base of the banks. Unity bank used the capital for branch development, information technology upgrade, upgrade of product and human resources. It also developed its corporate communication and enhancement of its working capital.
The effect of the additional capital can be seen in the improvement recorded in the performance of the banks in 2014 financial year. Unity Bank which made a loss of N22.58 in 2013 financial year made a profit of N10.69 billion in 2014 financial year. The capital generated by Diamond Bank in both the right issue and euro bond improved the bank’s capitalization by 50.5 per cent.
The banks also experienced improvement in terms of their shareholders’ fund. Zenith Bank closed 2014 financial year with shareholders fund of N552.64 billion as against N509.25 billion in 2013 financial year. First Bank closed with N522.89 billion in 2014 financial year in contrast to N471.78 billion in 2013 financial year. Access Bank closed 2014 with N277.41 billion in 2014 as against N244.48 billion in 2013. Diamond Bank closed 2014 with N209.03 billion as against N138.70 billion in 2013. Unity Bank closed 2014 with N76.26 billion compared to N28.21 billion in 2013.
All the banks also recorded significant increase in their loans and advances during the 2014 financial year as against 2013 figures. More banks have indicated their bid to go for capital raise through rights issue, private placement and, possibly Eurobond din the current financial year.
Experts see the issue of Eurobonds as a good development in the banking sector as it highlights the country’s growing sophistication and diversification in the financial sector. The fact that the banks in Nigeria are able to issue Eurobonds that received international acceptance shows that the banking sector is healthy. It also shows the strength and credibility of the sector; though experts also believe that the capital raising exercise by Nigerian banks through Eurobond makes the industry vulnerable to foreign exchange risk.