This Analysis Suggest State’s Bailout, CBN Review of Bank Charges Is Positive For Banks

The Central Bank of Nigeria (CBN) this week posted a circular to the banks requesting them to provide a list of products and services on which the prescribed charges (in the current guide to bank charges – GBC) are insufficient to cover costs incurred by the banks.

There was also the State loan for FGN bond swap that commenced this week.

Renaissance Capital says both events are positive for banks.

The CBN circular:

• Requested the banks to send through a list of products and services that were existing as at 31 March 2013 (i.e. before the current GBC was introduced by Sanusi), which were not adequately covered by the current GBC.
• It has also requested to see a list of new products and services introduced since the current GBC came into effect in April 2013 and justification for them.
• It would also like to see a list of products and services that the banks plan to introduces in the short to medium term, their proposed tariffs and justifications.

RenCap commentary on the CBN circular:

“We view this as a positive development. The phasing out of CoT remains a key concern for investors in Nigerian banks, particularly considering the current plan for CoT to move to 0% from next year. We have noticed this year that the banks have become relatively more confident than in previous years on the unlikelihood of CoT being wiped out completely, and we think it was on the back of expectations that CBN intended to review the bank charges. Still some time before we receive an updated GBC from the CBN and as these things work, there’s likely to first be a public draft doc before a final one is provided. Nevertheless, we expect at the minimum, the phasing out of CoT will be looked at, probably with a view to keeping it at current 0.1%.”

Nigeria also started restructuring short-term commercial bank loans to its cash-strapped state governments into longer-term sovereign bonds this week.

The Debt Management Office (DMO) issued bonds in respect of debts owed by 11 states to address “fiscal imbalance”, its director-general Abraham Nwankwo said. The bonds were issued to 14 commercial banks.

Nwankwo said 22 out of Nigeria’s 36 states had applied for a restructuring, and the debt office had asked them to reconcile their loan figures with the various lenders.

Commercial lenders were issued 2034 (20-year) bonds at a yield of 14.8 percent, analysts said.

The bond has a tax equivalent yield of 21.2 percent, analysts at Renaissance Capital said.

“Considering interest income on loans are taxed vs. bond interest income which is tax exempt, we estimate the tax equivalent yield on the FGN bonds at 21.2%. From our understanding, a significant number of the state loans were granted at rates ranging 18-20%, implying a marginally positive return for the banks on the back of this swap. In other words, while we could see some weakness in margins in 2H15, the banks should be marginally better off after tax. We do not have full details on per bank sizes just yet but expect this to be more positive for tier 1 banks, including Zenith, FBNH (management put its state loans at NGN110bn during 1H15 call – 5% of gross loans) and UBA. We reiterate that this development is positive for the sector for the following reasons:

Positive for capital adequacy ratios, as the bonds will be zero risk weighted vs. the loans which are 100% risk weighted.

Positive for liquidity ratios, given these are FGN securities.

Positive for asset quality, as it helps to significantly de-risk the sector’s balance sheet from otherwise potentially significant NPLs given the deteriorating macro conditions and stressed government cashflows.

One key downside from this asset swap is the implied duration risk it imposes on the banks, as the loans were mostly funded using short term funds.”

So there you have it. Perhaps it is time to buy Nigerian financials?

Nairametrics will analyse the banks next week and offer our opinion on which banks you can pull the trigger on, and those to avoid.