Nigerian Banks Exposed To Foreign Exchange Risk By Eurobonds
The Eurobond capital raising exercise by some Nigerian Banks makes the industry vulnerable to Foreign Exchange risk, say financial experts.
“By issuing Foreign currency denominated debt instruments, Nigerian Banks are exposing themselves to Foreign Exchange risk,” Mr. David Adonri, Chief Executive Officer, Lambeth Trust & InvestmentLimited told Financial Vanguard.
“Despite the fact that Foreign bonds offer lower rates, it is not devoid of risk. These Banks are going to be faced with Foreign Exchange Risk over the life of the bonds when issued,” said Mr. Jide Nwaogwugwu, Head, Research, Dunn Loren Merrifield Limited.
The experts are of the view that the capital raising exercise will put the Nigerian economy at risk, as it exposes the Banks to Foreign Exchange Risk and other risks associated with external borrowings.
However, they said the decision by the Banks to raise funds from the international financial market is not a pointer to the fact that the Banks have problems, but a reflection of the strength and credibility of the institutions.
A number of Nigerian Banks have announced plans to shore up their capital base by seeking funds from the international financial market and multilateral institutions.
Skye Bank had, a couple of weeks ago, raised $100 million (N16 billion) from a multilateral institution at a floating coupon rate of 6.3 per cent for seven years.
Chief Executive Officer/Managing Director, Skye Bank, Mr. Kehinde Durosinmi-Etti, said the bond issuance programme is aimed at boosting the bank’s capital base, adding that the exercise will add about two per cent to its capital adequacy ratio.
While also announcing its interest to raise Foreign denominated bonds, Diamond Bank said it would seek the approval of its shareholders at its next annual general meeting, to raise $200 million (N32 billion). The bank said it would target strategic investors including the subsidiary of the World Bank, the International Finance Corporation, IFC.
According to reports, other Banks that have already raised funds or indicated interest to access the international financial market for bonds issuance programmes are Guaranty Trust Bank (GTB) Plc, United Bank for Africa Plc and First Bank of Nigeria Plc.
A couple of years ago, a number of Nigerian firms having transactions with the international financial market had their profits eroded following the devaluation of the naira.
Prominent among the companies are Flour Mills Nigeria Plc, which in recorded Foreign Exchange loss of N6.2 billion, while its subsidiary, Nigerian Bags Manufacturing Company Plc, BAGCO, recorded a loss of N246 million in respect of a Foreign currency denominated facility.
Telecommunication firm, Starcomms Plc, also had its profit eroded, with unrealised Foreign Exchange losses among other factors accounting for its N1.1 billion loss before taxation.
The quest to raise funds from the international market, according to analysts, is as a result of the collapse of the Nigerian capital market and the prevailing high interest rates in the bond market.
Mr. David Adonri, Chief Executive Officer, Lambeth Trust & Investment Company Limited, said that by issuing Foreign currency denominated debt instruments, Nigerian Banks are exposing themselves to Foreign Exchange risk. He expressed skepticism about the ability and preparedness of the Banks to manage the risks associated with seeking funding from the international market.
He said: “By issuing Foreign currency denominated debt, Nigerian Banks are exposing themselves to Foreign Exchange risk. There are benefits attendant to issuing Foreign debt but because repayment is in Foreign currency, it is suited for enterprises that earn substantial portion of their income in hard currency.
“If Exchange rate stability is assured, the Banks can actually make fortunes by just using the cheap Foreign debt to finance the high-yielding domestic debt the government is insatiably issuing.”
Continuing, Adonri, stated, “More Foreign denominated bonds would reduce the current excessive pressure on the domestic debt market with positive impact on interest rate.”
He argued that it will encourage Foreign investment flow to equities, as a result of hard currency inflow that will ultimately strengthen the naira.
“Any Foreign currency denominated corporate bond issued by a local company imposes Exchange rate Risk on the issuer. However, due to the high cost of issuing debt in Nigeria, there is justification for a local issuer to take advantage of the lower interest rates prevalent in the international capital market,” he said.
According to him, the quest was in consistent with normal banking business, saying, “Most of the Banks are issuing the Foreign bonds to finance domestic infrastructure development with potentials for profitable returns. This type of capital aggregation and subsequent inter-mediation by Banks is consistent with the normal course of banking business,” he maintained.
He, however, said: “It would be a positive development for the economy if Exchange rate stability is maintained so that the Exchange rate Risk is minimized.”
In his own view, Mr. Jide Nwaogwugwu, Head, Research, Dunn Loren Merrifield Limited, argued that despite the fact that Foreign bonds offer lower rates, there are risks involved. According to him, these Banks are going to be faced with Foreign Exchange Risk over the life of the bonds when issued.
“In the long run, it is not in the best interest of the economy. However, we should continue our call on the regulatory body, the Monetary Policy Committee, MPC, to look into the downward review of the Monetary Policy Rate (MPR) which currently stands at 12.00 per cent,” he noted.
Nwaogwugwu also added that the Banks need funds to increase their capital base and fund their various planned pan-African expansion, noting, however, that ideally, the money would have been sourced locally through the issuance of domestic bonds.
According to him, the current high interest regime, however, makes sourcing funds locally less appealing as it translates into raising money at rates ranging from 18 per cent to 20 per cent. “This has led to a quest to issue Foreign bonds at lower rates ranging from 5.50 per cent – 8.00 per cent given that the FGN Eurobond which serves as a benchmark for Nigerian corporates is trading at circa 5.00 per cent.”
Mr. Wale Abe, Executive Secretary/Chief Executive Officer, Financial Markets Dealers Association, FMDA, said despite the risks involved, international fund raising does not signpost any bad news, neither does it tell anything about the state of those banks.
According to him, a bank is to raise liabilities through a combination of instruments —short-term and long-term. “Deposits are usually short or long-term liabilities by way of long-term borrowings using instruments like public offers and debt instruments like bonds.
Indeed, if the Banks succeed, it is to tell you that the investors have confidence not just in Nigerian Banks but the economy in general, because the Banks must pass certain quality ratings to make them attractive enough. International investments are based on credible and transparent standards and ratings. For any bank to think of it therefore, it must have what it takes to qualify it to approach the international debt market,” he said.
Also reacting, Mr. Tola Odukoya, Vice-President, Investment Research at Dunn Loren Merrifield, said: “I do not believe that raising finance from international markets via Eurobonds suggests that the Banks have problems. In my opinion, the opposite is the case. This is because raising capital from international investors requires more disclosures and rigorous analysis of the issuer, including a credit rating by any of the global rating agencies.
“Therefore, I doubt if any weak institution will be able to successfully raise funding from the international financial markets, rather it is the relatively strong ones that can execute this successfully. Beyond this, you will recall that the two Banks that have successfully raised funds via Eurobonds- First Bank and GTB – are two of the top five Banks in Nigeria.
However, the trend could also be an indication of the effects of the prevailing high domestic interest rate, which is a strong disincentive to potential issuers of long-term debt,” he said.
Sourcing funds from the international market, according to Mr. Oluseye Adetunmbi, Chief Responsibility Officer, Value Investing Nigeria Limited, should not be seen as a symptom of unhealthiness in Nigerian banks.
“Soludo’s intervention has since addressed the issue of health of Nigerian banks. It is either an actual seeking of funds to meet an increasing domestic business needs of the Banks or for the purpose of broadening the scope of the banks’ operations on the international frontiers.
“Remember that the kind of bond window being explored is a structured international bank. To venture exploring raising capital in the first instance is a sign of strength. If these Nigerian Banks are not healthy, they won’t be looking at international bond market that will do due diligence on the issuer before exposing their market to such investment.”
Commenting further, Adonri said from available data, the banking industry is in good health, adding that their Risk assets are now generally centered on high-yielding gilt edged government securities.
“There are also emerging opportunities in the economy that the Banks can finance with longer tenor funds. The potentials of infrastructure finance are currently begging to be exploited profitably. Due to collapse of equities primary market and the high cost of issuing long- term domestic debt, it is cheaper for Nigerian Banks to access long-term funds from the international capital market,” he stated.
For Mr. Johnson Chukwu, Managing Director/CEO, Cowry Assets Management Limited, the major cause of the new quest by Banks to float Eurobonds is lack of depth of the Nigeria capital market. He explained that the ‘haircut’ the local Banks suffered in the assets they sold to Asset Management Corporation of Nigeria, AMCON, may have affected their liquidity position and their ability to create Risk assets, saying that by raising bonds from the international market, the Banks would be reflating their balance sheet and repositioning for new business opportunities in the power and infrastructure sectors.
Chukwu maintained that since the major institutional investors in the capital market – local Banks and Pension Fund Administrators (PFAs)- are averse to banks’ bonds, interested issuers prefer to use the Foreign market to meet funding needs.
“Presently, the major institutional investors in the Nigerian fixed income market are the Banks and the Pension Fund Administrators. While Banks may not be keen on investing in other banks’ bonds, the PFAs currently prefer FGN bonds, which are giving them yields of more than 15 per cent. This leaves the Banks that intend to issue bonds to look for alternative markets to raise funds,” he stressed.
Nigerian Banks Exposed To Foreign Exchange Risk By Eurobonds
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