International business website, Bloomberg,
has written a new article on the recent devaluation of the Naira.
According to the magazine, the excitement from the devaluation is
shortlived as the Nigerian economy has since sunk further. Read the
article below
Optimism
that a devaluation of Nigeria’s naira would breathe life into the
country’s banking stocks faded almost as quickly as it started.
The
central bank’s abandoning of a 16-month currency peg was greeted with a
world-beating rally in the nation’s shares on expectations foreign
investors would return to Africa’s largest economy. It didn’t last, with
all but two of the country’s biggest banking stocks falling since the
naira started trading freely on June 20.
The
main risk is coming from a possible recession that will make it harder
for lenders to make money and extend credit with unpaid loans on the
increase. Trading in foreign currency, which all but dried up because of
the exchange controls, is yet to pick up. Foreigners have not flocked
back amid lower oil prices and the U.K.’s vote to leave the European
Union, with investors such as AllianceBernstein LP and Loomis Sayles
& Co. saying the naira’s 29 percent depreciation isn’t enough.
“The
devaluation of the naira is not a silver bullet,” said Jaap Meijer, the
managing director of research at Dubai-based Arqaam Capital Ltd., who
helped his clients make a 55 percent return if they followed his advice
over the past three months on Guaranty Trust Bank Plc, Nigeria’s biggest
lender by market value. “There are just too many headwinds, with a
devaluation probably worsening the asset quality outside the oil and gas
industry.”
The
10-member Nigerian Stock Exchange Banks Index has declined 6 percent
since surging to a 9-month high on June 23. That compares with a 4
percent drop in the NSE All Share Index over the same period, with
Sterling Bank Plc, Unity Bank Plc, Zenith Bank Plc and FBN Holdings Plc
among the 10 biggest losers.
‘Natural Concern’
“The
ability of companies to pay back the money that banks have given them
is a natural concern,” said Adewale Okunrinboye, an analyst at
Lagos-based Asset & Resource Management Co., which has 690 billion
naira ($2.4 billion) under management. “Companies will be struggling to
sell products and generate cash flows.”
Not
everyone is bearish on banks following the devaluation, with the
country’s lenders trading at 4.5 times future earnings compared with 9.2
for South African banks, according to data compiled by Bloomberg.
“The
benefits outweigh the risks,” although smaller lenders may struggle to
replenish capital levels, said Derrick Mensah, an analyst at African
Alliance in Accra. “Net-net the depreciation is positive, not just for
banks, but for the broader economy. It’s not going to happen overnight.”
Long Dollars
Most
of the country’s biggest lenders have long-dollar foreign-exchange
positions, which will result in revaluation gains that will compensate
for any deterioration in the quality of their assets and capital levels
caused by the currency’s decline, Renaissance Capital analysts Adesoji
Solanke and Olamipo Ogunsanya said in a June 27 note. An interest rate
increase will also help improve margins on loans, they said.
“The
economy might not immediately return to growth, but at least the
bleeding should stop,” said Ronak Gadhia, an analyst at Exotix Partners
LLP in London, who has buy ratings on Guaranty Trust Bank and United
Bank for Africa Plc, and sell recommendations on Access Bank Plc and
Skye Bank.
“If
the foreign-exchange market functions properly, it should allow bank
customers to source foreign currency, which is a positive,” he said. “It
will enable the banks to grow their letters of credit and commission
income.”
Rules Delayed
Nigerian
authorities delayed by at least a year the introduction of more
stringent capital rules for banks on June 27, as the regulator seeks to
spur the economy and encourage lending. The economy shrank for the first
time since 2004 in the first quarter as investment shriveled and
businesses battled to find dollars to import materials.
The
ratio of loans not paid for more than three months worsened to 4.9
percent at the end of last year from 2.8 percent in 2014, according to
the Nigeria Deposit Insurance Corp. The naira, which weakened to a
record low of 286.50 per dollar on June 21, gained 0.1 percent to 282.50
by 7 a.m. in Lagos.
Nigeria
may have to again consider buying bad debts to reverse a contraction in
lending, Arqaam’s Meijer said. Regulators six years ago had to rescue
the industry from collapse after a debt crisis and amid allegations of
corruption, setting up the Asset Management Corp. of Nigeria to take on
non-performing loans.
“There
are a lot of issues that haven’t been addressed that still need to come
through in terms of asset quality,” with the devaluation probably
increasing leverage by 20 percent and pushing foreign-exchange loans to
50 percent of the system, he said. “A weak banking sector isn’t
conducive to economic growth.”
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