Africa Weekly Review: Banks’ exposure to Nigerian stock exchange. Ecobank extends issue.

Banks’ exposure to Nigerian stock exchange

The Central Bank of Nigeria (CBN) throws some light on bank lending for stock market trading in circular of 2 October entitled Rescheduling of specific debts. It was driven by the concern of some banks about their ability to comply with the section of the Prudential Guidelines covering classification of non-performing loans. The circular notes that bank loans for the purchase of listed shares should have been granted with longer terms, and stipulates that such loans can now be restructured for terms up to 31 December 2009.

At first glance, it is unclear why the CBN should rule on the term of bank loans. It is standard practice for banks across the world to reschedule their loans according to their internal credit assessments. Anecdotal evidence suggests that, during the stock market bull run, some banks lent too much and with inadequate margins for such trading. They have had to make margin calls on their customers (or may need to do so in the future) and are reluctant to classify the additional exposure as non-performing. This would explain the CBN circular.

Paucity of data

There is no hard data available for the scale of this phenomenon. We also note that the CBN is highly sensitive to commentary by bank analysts. At least one analyst has been summoned to Abuja for discussions. The Chartered Institute of Bankers in Lagos has said that these loans are secured with cover of up to 150 per cent. Since the all-share index is today 32 per cent off its 12-month peak, this would suggest that many margin loans are adequately covered. The financial press in Lagos has estimated total outstanding margin loans at NGN340 billion (US$2.9 billion), equivalent to less than 5 per cent of total private-sector credit.

We understand that margin loans, together with loans to dealer brokers and other credits secured by equity holdings, represent close to 20 per cent of the loan portfolio of one Nigerian bank, which is viewed in the market as a well-managed institution. The ratio is said to be higher in one or two cases.

Our view therefore is that the CBN is being cautious, veering towards over-cautious. One plausible explanation in the market for this stance is that the CBN is preparing to lift the 1 per cent cap on daily stock price movements imposed on 27 August. We also feel that the package of measures introduced to boost liquidity on 18 September (Africa Weekly Review, 24 September) was a highly cautious move. We see three reasons to warrant such a stance.

Official foreign-exchange reserves (US$ bn; end-quarter)

First, the recapitalisation of the banking sector is the greatest achievement of the CBN under the governorship of Charles Soludo, who is naturally eager to protect its (and his) reputation. His term ends in mid-2009 and is most unlikely to be renewed. Secondly, in the present global market turmoil, central banks should tend towards over-reaction since the potential damage is less than under the alternative of not seeing the need to act or intervening timidly.

A third reason relates to the timeliness of the data available to the CBN and the rapidity of its response to the data. Foreign exchange inflows to the market ran at more than US$2 billion a month until the first quarter of this year. The CBN response was to sterilise inflows through open market operations. However, when the inflows slowed sharply, as can be seen from the data for official reserves in the chart, it was slow to adjust the level of the sterilisation. This contributed to the reduction in liquidity to which the CBN over-reacted with its measures of 18 September.

Ecobank: Equity issue extended

Ecobank Transnational Incorporated (ETI) has extended the closing date for its equity issue totalling the equivalent of US$2.5 billion across three exchanges (Lagos, Accra and Abidjan). It has been extended from 3 October to 17 October in Lagos, and to 31 October in Accra and Abidjan. The bank said that many would-be Muslim investors had been unable to subscribe because of their Ramadan obligations. We think that international demand has probably fallen short of the board’s expectations, while local institutions, many of which would have subscribed to the offer for reasons of standard portfolio management, have proved more solid.

This was an ambitious issue when it opened in late August, and has become more so now given the fall of markets amid global uncertainty. ETI is looking to raise three times the Kenyan government’s take from the Safaricom IPO in early June. A prominent broker in Accra told us that investor interest had been “good not great”. He noted that local investors tended, even in conditions of market calm, to leave their applications until the very end of the offer period. Given the market turmoil, it may well prove that the extension of the offer, which is a combination of rights and new issues, will add little to the capital raised.

Ecobank, however, is a strong African brand and has good financials. The World Bank’s IFC (its private-sector lending arm) has recently demonstrated confidence in Ecobank by approving a loan of more than US$210 million to support its lending to SMEs and its regional expansion. The funds raised from the issue will be deployed to enter new markets in Africa (such as Angola), boost the capital of some existing country operations and prepare for possible acquisitions.

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African property: Magnet for remittances.
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South African mining: Opportunities in a changing regulatory environment
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With best regards,
Gregory Kronsten
Director, Africa Research
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