• Banks count on new entrants investors as established investors opt for govt debt instrument
• Players urged to embark on holistic sensitisation campaign
• Over N10tr flows to treasury bills in three months
• Foreign participation drops from 70 to 18 per cent in 10yrs
With banks and other operating firms seeking to raise over N3 trillion from the capital market in the coming months, there are growing doubts that the Nigerian economy can soak the expected fundraising pressure.
Whereas the banks are shopping for about N2.5 trillion to meet their new recapitalisation targets, other firms are planning to shore up their operating funds, which were eroded by heavy foreign exchange losses. Nigerian Breweries Plc alone is shopping for N600 billion to cover naira depreciation losses and other needs.
This comes as established investors continue to move their assets to government debt instruments with about N10 trillion said to have left the banking system for treasury bills in the last three months.
Banks expect new entrants to come to their rescue as in the case of the 2005 exercise but experts warned that the conditions of the market are different with millions of Nigerians who lost their savings in the 2008/2009 bubble bust yet to regain confidence in the market.
The skepticisms are further triggered by the fact that the market has shrunk since 2005, the last time banks went to the market en masse to raise funds.
First, the disillusioned retail investors have not retained since the 2008 crisis just as foreign investors, whose participation was about 70 per cent about 10 years ago, are yet to return. The participation dropped to 18 in February.
The prospects of foreign roadshows are complicated by the protracted monetary tightening. The hope of interest rate easing from the second half of the year is now threatened by renewed inflation concerns, which experts said could shift the return of easy money to a later date.
Indeed, economists at the weekend argued that the current breadth and depth of the capital market may not be able to absorb the level of fundraising, unless the banks embark on a strategic sensitisation programme to bring fresh investors into the market.
Market capitalisation of the Nigerian Exchange Limited (NGX), which is currently put at $40.2 billion and constitutes a paltry 10.72 per cent of Nigeria’s gross domestic product (GDP) is considered extremely low for a country of over 200 million people. And it is far below its peers.
The United States capital market is about 147 per cent of its economy while Malaysia’s is 121.3 per cent. South Africa’s over $1 trillion market capitalisation is 322 per cent of its economy.
In terms of the number of participants, the Nigerian capital market has shrunk – 155 listed equities compared to 1993 when the number was 174 and in 2010 when it was 217. The size of the capital market has constrained its role in capital formation and economic development, experts have observed.
According to industry analysts, the pension fund remains a major source of stimulating activities of the market and increases its capacity to fund the economy. However, the overall allocation of pension funds, which stood at N18 trillion in December 2023, is below six per cent.
Despite its low capacity, seven banks joined with Nigerian Breweries Plc have concluded plans to raise a total of N1.9 trillion from the market in the coming months.
Access Bank has announced plans to raise N355 billion while First Bank is seeking to get N300 billion. Stanbic IBTC and Fidelity Bank are floating N150 billion and N32 billion funding raising campaigns while Sterling Bank, Wema Bank and Nigerian Breweries are approaching the market to raise additional N100 billion, N200 billion and N600 billion respectively.
The market is awaiting plans by Zenith Bank, the United Bank for Africa, Guaranty Trust Bank, Ecobank and many other financial institutions that are seeking to beef up their paid-up capital to meet the new capital requirements ahead of 2026.
S&P Global Ratings has put the overall minimum capital gap of Nigerian banks at N2.5 trillion with the shortfall of the top five lenders – Access Bank, First Bank of Nigeria, GTBank, UBA and Zenith Bank – accounting for 60 per cent (N1.5 trillion).
Meeting the needs of the local market, experts have said, is a tough task. A professor of finance at the University of Nigeria Nsukka, Chuke Nwude, said the market is still shallow and yet to be properly positioned to support the huge funding need.
He said the depth of the capital market cannot carry such a level of fundraising as the mood of the economy does not encourage investment in the capital market.
“Interest rate is high, inflation is skyrocketing, MPR heightened and at that level of economic variables, manufacturing is going down, cost of funds is high, products are not churned out, one of the causes of inflation is when demand exceeds supply.
“Many companies are closing shops; they are exiting Nigeria. This is because of the nature of the Nigerian economy that does not encourage production.
“Companies are converting the borrowings in their financial statements into equity, that does not solve the problem, if you convert debt or loan into equity, at the end of the day you must pay dividends. If the owners of the capital are foreign-based you must buy foreign currency to pay them their dividend.
“At the level of operations of the Nigerian capital market, I don’t think it can even go midway, investors will be exhausted because the market is still very shallow.”
Nwude said a situation where the weaker banks will attempt to cut corners and flout recommendations in an aggressive move to meet the recapitalisation requirement and remain in the market will play out during the reacpitalisation exercise.
“I know that some banks will try to cut corners or doctor their financials to show that they have played by the capital requirement, but it is fictitious and anything fictitious can fizzle out at any time.
“Of course, if we go by history, during the previous exercise, many banks were liquidated, some even engaged in financial crimes to show that they doctored their financials claiming that they raised new capital where many of them did not succeed, we knew what happened then, so if such repeat itself this time around, we are going back to square one,” he warned.
There are high expectations that the recapitalisation exercise will attract foreign investors into the banking industry through foreign direct investments (FDI), thereby supporting the country to drive part of the much-needed long-term foreign currency investment into the banking sector to stabilise the value of the naira.
The lingering macroeconomic challenges have discouraged foreigners from the Nigerian capital market over the last decade.
As of February 2014, the percentage of foreign investment in the capital market stood at 68.6 per cent, higher than total domestic transactions which constitute only 31 per cent of overall transactions. Also, total foreign transactions hit N136 billion, while total domestic transactions were N62 billion.
However, the latest report of the Exchange released in February 2024 showed that the participation of foreigners has dropped steadily in the last 10 years, constituting a paltry 18 per cent.
Meanwhile, funds are steadily flowing out of equities to treasury bills and the bond market. More than N10.4 trillion is said to have flowed to treasury bills in the past three months. Much of the money was pulled from the banking system.
With the large chunk pulled from the system, experts believed that individual investors and corporate institutions may not have additional multiples of trillion needed in other classes of assets.
Again, the private sector may not consider the instrument as attractive given the alternatives available in the market, including investing in government instruments.
“It will be a tough one because of the high-interest rate environment. Who will buy equities when fixed income can give you a yield of 27 per cent, more so all the banks are hitting the market at the same time, said the Head of Equity, Planet Capital, Dr. Paul Uzum.
Uzum argued that with the likes of Nigerian Breweries indicating interest in raising N600 billion from the same market, only banks like GTCO and Zenith that have been consistent over the years will not find it difficult to raise the requisite capital.
“Many investors will prefer to invest in short-term instruments when they are not so sure of how high rates may go. It will also be very tough for the banks to hit the market to raise equity. Who will buy equity when you can get 27 per cent yield from the government,” he queried.
An economist, Johnson Chukwu, debunked expectations that foreigners would participate and invest heavily in Nigerian banks during the recapitalisation exercise.
“Do you think foreign investors will just come to a country because banks are raising capital? No, foreign investors determine the risk assessment of each country before deciding whether to go to those countries.
“They already have prime target market and sectors, they do not ramble around looking for anything to invest in, so the expectation that foreign investors will come and start mopping up does not arise, they will consider the sovereign risk they want to take, whether they are interested in banking industry in Nigeria and their expectations of future growth of the Nigerian banking industry.
“He also stated that foreign investors will not invest in the banking industry of a country where capital investment remains constant forever, and does not appreciate it because earnings retained are not counted as part of the shareholders’ fund.
Vice President of Highcap Securities, David Adonri, also expressed doubt on the capacity of the debt capital market, which is currently less active due to the volume of activities in the money market where the CBN is selling a large volume of securities at an alarming rate under its Open Market Operation (OMO) to tighten money supply.
Consequently, he argued that if this continues with undiminished intensity, it can cause migration of financial assets from equities to debt which may derail the flow of investment funds to the primary equities market for the bank recapitalisation.
However, he stated that with the aggregate amount of fresh funds required to meet the recapitalisation exercise totaling N4.3 trillion, constituting about 7.3 per cent of equities market capitalisation and 10 per cent of the debt market capitalisation of the Nigerian Exchange Limited (NGX), the stock market is well positioned to mobilise funds and absorb pressure by banks ahead of the recapitalisaion exercise.
A professor of capital market at Nasarawa State University, Uche Uwaleke, said even if the market as presently constituted is not able to provide the entire N4 trillion, the influx of new entrants both domestic and foreign investors would expand the current boundaries of the market above present capacity to provide any amount of fund needed for the exercise.
“In 2005, the same fear was expressed whether the stock market has the capacity but the market rose to the challenge. The stock market was able to accommodate that in 2005, over N400 billion was raised from the market.
“What is likely to play out now is that a lot of new investors are likely to come in; foreign investors will come. So, there is going to be an influx of new entrants into the stock market.
“With this, the boundaries and frontier of the market will rise above present capacity and you find the market being deeper in terms of depth and breadth and terms of the number of investors in the market.”
