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Nigeria Weekly Update: Low Naira yields, for how long?

Last week, President Muhammadu Buhari directed the Central Bank of Nigeria (CBN) to halt the sale of foreign exchange for food importation.

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Market interest, Nigeria Weekly Update: A better NPL picture

Last week, President Muhammadu Buhari directed the Central Bank of Nigeria (CBN) to halt the sale of foreign exchange for food importation. This prompted front-page headlines defending CBN independence, which we believe will be heeded. However, combined with the CBN’s own pro-growth strategy, with one-year risk-free rates down 155bps in two months, we can see the effects in the main foreign exchange market, the NAFEX market, where turnover has risen steeply. This raises questions over interest rates.

FX

The spike in foreign exchange turnover does not prompt us to worry about the Naira/US dollar exchange rate, at least not for the rest of this year. With foreign reserves of US$44.43 billion, we believe the CBN is well-positioned to sustain the Naira at current levels. In effect, the CBN has a war chest.

Bonds & T-bills

The yield on a Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity rose by 24bps to 14.32%, and at 3 years increased by 164bps to 14.59% last week. The yield on a 364-day T-bill fell by 3bps to 12.17%. The yield on a T-bill with 3 months to maturity rose by 198bps to 14.28%.

The yield on the benchmark 10-yr US treasury fell below the 2-yr rate last week and this yield curve inversion sparked fears of a global recession, leading to sell-offs across key equity markets. Sell-offs also occurred in emerging money markets and fixed income markets. In the Nigerian T-bill market, bearish sentiments were towards the short end of the curve with yields on 91-day paper advancing by 198bps, while selling pressure in the bond market were evident in 3-year yields which widened by 164bps. Investors’ fear of a global recession is increasingly leading them to seek safe havens in less risky instruments rather than positions in emerging and developing markets.

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Oil

The price of Brent rose by 0.19% last week to US$58.64/bbl. The average price, year-to-date, is US$65.41/bbl, 8.77% lower than the average of US$71.69/bbl in 2018, but 19.48% higher than the US$54.75/bbl average seen in 2017.

Despite OPEC’s bid to maintain tight oil supply, the market is still oversupplied and demand is weak. In its latest report, OPEC downgrades its forecast for oil demand to 1.10 million bpd, down just 0.04 million bpd from the previous month. To keep oil prices high, we should not rule out the possibility of additional supply cuts by the cartel.

Equities

The Nigerian Stock Exchange (NSE) All-Share Index lost 1.40% last week, resulting in a year-to-date return of negative 14.33%. Last week CCNN (+3.57%), MTN Nigeria (+3.05%) and Zenith Bank (+1.53%) closed positive while Stanbic IBTC (-13.39%), Unilever Nigeria (-12.81%) and Nestle Nigeria (-10.00%) fell.

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Bearish sentiment was still present in the three trading sessions of last week, bringing some stocks to new 52-week lows. Most investors appear content to play in the money markets and fixed income markets where current yields are 109-351bps above inflation.

Low Naira yields for how long? (1/2)

The Nigerian economy has been growing below its potential, or at least below its 10-year average, since 2015. Price stability in the same period recorded significant gains. This a reminder that growth and price stability many times occur in sequence and seldom together.

The CBN clearly is in a mode to stimulate the economy. To achieve its growth objective it announced a rate cut in the MPR to 13.50% in March and has offered declining yields on short-term stabilisation bills since April. On the other hand, inflation has held steady at around 11% this year.

[READ ALSO: B.O.C. Gases Plc leads this week’s gainers as losses mount on the NSE]

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The reaction of the market to an initial compression in real yields has been two-phased. The first was indifference, in so far as yields in the global market were also trending downwards. The second phase has been a significant drop in foreign demand for OMO bills and increased pressure CBN reserves.

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In 2018, a similar response to compression in real yields was observed. While yields on OMO bills held around 13% between March and June, inflation on average was slowing at an average of 69bps per month, improving the inflation-adjusted yields on these securities. However, inflation began accelerating in H2 2018 and with yields still unchanged, foreign demand began to wane – until OMO yields began to increase in September 2018.

Last year, a nearly two percentage point increase in OMO yields was the masterstroke to alleviate pressure in the FX market and restore demand for the Naira carry-trade. As a result, FPI inflows recovered to a quarter of total foreign exchange supply in the NAFEX window by October, having fallen to 17% in August. Presently, CBN reserves are down 2% in the last 30 days.

[READ FURTHER: How to read stock market tables]

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This raises two questions. The first is whether the CBN will seek to raise market interest rates again, as it did last year. The second is whether international investors have as much appetite for Naira as they did in late 2018.

 

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#ENDSARS Protests: Why this is different

The #ENDSARS is not just a protest about rogue police officers, it is larger than that and this is why.

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In June 2019, the Hong Kong Government revealed plans to implement a controversial law that allows the extradition of Hong Kong citizens to mainland China.  

As the government dithered, pockets of protests broke out, which triggered clashes with Policemen that most protesters viewed as excessive. Within days, protesters went from a few thousands to over 2 million, the largest in the history of Hong Kong.  

By the time the government decided to pull back the bill; the protesters, many of them young, were already demanding for more than just a withdrawal of the bill. They wanted the police investigated and prosecuted for using excessive force, amnesty for protesters, and a right to vote for all.  

The protests lasted for about 6 months only to be dissipated by social distancing requirements, due to the COVID-19 pandemic. Before then, protesters had grounded the economy, which drove the Hong Kong economy into a recession and $3 billion in stimulus.  

Nigeria is experiencing its own version of protests similar to that of Hong Kong, except that it does not have any money to inject as stimulus. The latest protests were triggered by anger over the alleged violent killings and extortion by the controversial anti-robbery unit of the police, known as SARS or FSARS.  

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For years, young Nigerians, mostly via social media, have called for the unit to be disbanded and rogue elements in the force brought to justice. Despite repeated promises by the government, they have failed to heed to their demands, triggering a new wave of protests that has now spread across the country. 

From demanding an end to SARS, prosecution of rogue police officers, and reforms; Protesters are more emboldened, threatening to continue if all their demands are not met. The government is scrambling to contain a situation that is escalating and could dangerously metamorphose into violent clashes with authorities, leading to loss of lives and destruction of properties 

There is also fear that this week’s protest could be sustained for more days, if not weeksYou only need to look at the economy of the Nigerian Youth to understand why this is such a critical moment. 

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According to data from the National Bureau of Statistics, Youth unemployment is at an all-time high of 34.9%, making up 64.3% of total unemployed Nigerians. University students have also been at home for months, due to the 7 months ASUU strike.  

Their parents are also facing tougher economic conditions with inflation rate galloping past 13%, after multiple devaluations and the removal of fuel subsidy. It was just a matter of time for them to find a rallying point to vent their frustration. 

There is still a window for the government to deescalate tensions, and it is not just by accepting the terms of protesters on paper and making bogus pronouncements. Nigerian youths want concrete actions and it starts by making immediate changes in the leadership of the Police – the rogue unit in particular. Officers suspected of murdering innocent Nigerians need to be made to face justice.  

The government also needs to urgently resolve its dispute with the Academic Staff Union of Universities (ASUU) on the Integrated Payroll and Personnel Information System (IPPIS). Students and young Nigerians also need to be offered grants and palliatives to help them cushion the effects of an economic crunch that is in no way their making.  

Proceeds from the Nigerian Youth Investment Funds should be disbursed immediately to those who have applied. The government also needs to introduce student loan schemes for millions of Nigerian youths, who can’t afford to pay for quality university education.  

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The National Assembly also needs to introduce laws that protect young Nigerians from police brutality, status profiling and wrongful arrest. Investments in mega tech hubs across the country, establishment of recreation zones in major cities must be carried out by State Governments, to keep them engaged in activities that can better their lives.  

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No investor, local or foreign will put money in any country where its youths are in long-drawn protest with the governmentAs the economic cost of the protests for the last few days continues to mountthe negative effects could be more dire than a deeper recession. 

#ENDSARS does not just represent a protest against rogue Police officers; it is a symptom of the poor state of the economy, which for months has only gotten worse. Fortunately, the agitation can still be managed but time is running out.  

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Thrive Agric: “Where is my money?”

AgriTech firms make promises of mouth-watering returns, but what they do not reveal loud enough is just how risky the investment is.

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Fund a farmer, make a profit! Thus, says Thrive Agric, a popular AgriTech company that crowdsources funds from investors in exchange for a profit. The business model appears simple and easy for any basic investor to understand.

When you invest through them, they pool your funds along with other investors and then invest the collective sums in farms across the country. When the farmers harvest, they sell the farm produce at a profit, receive the cash, and split among investors who contributed to the pool. The company keeps a commission for itself. It all makes business sense, except for one thorny challenge – It is highly risky.

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Last week, a Twitter user posted a tweet demanding a refund of his investment in Thrive Agric – almost a million naira. The company lamented that they could not pay him, because they had experienced losses due to the COVID-19 pandemic. The investor was taking none of the excuses, resulting in a name and shame on twitter that has since gone viral.

READ: Nigeria’s Broadband subscriptions peak at 82.7m – Prof. Danbatta

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AgriTech Investments as they have come to be known has gained popularity as a viable investment option for Nigerians, who are still afraid of investing in the stock market. The largely unregulated sector leverages technology, an easy and relatable business model, and the promise of a mouth-watering return to yield-hungry investors. What they however do not reveal loud enough is just how risky the investment is.

Farming in a country like Nigeria is a highly risky venture that relies on a value chain that is fragmented, full of middlemen, and largely inefficient. Nigeria’s average yield per hectare is one of the lowest in the world, largely due to lack of farming inputs such as fertilizer, irrigation, and insecurity.

READ: We wanted to help users pay themselves first – Piggyvest

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AgriTech firms like Thrive Agric face these risks when they pool money from investors and pass on to farmers. Though part of their role in the investment scheme includes monitoring how the funds are utilized by farmers, they have no control over several risk factors such as the impact of COVID-19, which they alluded to as the challenges for not being able to pay investors.

Perhaps, if they disclose the inherent risks in the business, investors will be better informed and size up their risk against the returns. A cursory look at the company’s website reveals there is nowhere that it is mentioned that there is a risk of not getting all or part of your money when you invest. It probably would ruin the pitch if they did.

READ: Livestock Feeds: How this company survived over half a century producing animal feed

This is why when you visit their website and that of their competitors like Farmcrowdy (who pioneered this business) what you see are testimonials of just how well the investments are doing. You could argue that they had not defaulted in any of their previous rounds, so there was no need to say otherwise.

However, alerting investors about the inherent risks in a crowdsource investment scheme is not only responsible but a matter of best practice and compliance. The Security and Exchange Commission (SEC), noted this in its draft Exposure on Proposed News Rules guiding crowdfunding. Section 9a (iv) states that the crowdfunding company is expected to share a general risk warning on participating in funding through the company’s platform.

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READ: Where to invest your N5m to N500m safely and securely

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It also requires in Section 14 that they must publish on their website that “Investing through an online portal is risky and Issuers raising funds through the portal include new or rapidly growing ventures,” and that “Investment in the businesses hosted on the portal is very speculative and carries high risks; Investors may lose their entire investment and must be in a position to bear this risk without undue hardship.” This proposed compliance requirement is not been done by most AgriTech firms.

If this had been published on its website and duly communicated to its potential investors, we may have avoided the embarrassing and reputation damaging question that any fund manager wants to avoid – “Where is my money?”, especially if they don’t have it.

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First Bank is cutting inefficiencies and focusing on its strengths

While the bank has everything to be thankful for, care should still be taken towards driving its growth objective.

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First bank, Dr. Adesola Adeduntan, CEO, FirstBank

Being the first entrant to any industry, no matter how lucrative, is only an advantage when there is zero competition. In the real world, for any business to stay in the game, it must constantly innovate, expand its market share, and carry out the necessary moves to survive the equally changing business and economic landscape. First Bank being the premier bank in West Africa has undoubtedly witnessed this change over time. If there is one thing the bank has done, it has stayed relevant through decades, even after many that came after it have fallen by the wayside.

READ: CAC to register companies within 48 hours, approve business name same day

The year 2020 had forced many businesses across the world to reassess their positions, and a strategy many have adopted is cost cutting – for good reasons. Given the economic and financial constraints with limited resources, cutting operational inefficiencies and focusing on areas that offer the best value has proven to be worth the effort for many. While the COVID-19 pandemic might not have had anything to do with FBN Holdings cutting off its risk underwriting business, FBN Insurance ltd, the company made the decision within the year and it couldn’t have come at a better time than when it did.

READ: FIDELITY BANK PLC: Frail earnings outlook but valuations still attractive

First Bank’s performance in Q2 2020

Like most companies, First Bank’s revenue (Net interest income) took a hit as stated in its Q2 2020 Y-O-Y results. Net interest income dropped by 7.34%, from N141.7 billion in Q2 2019 to N131.3 billion in Q2 2020, following significant reduction in investment securities over the quarter. Profit before tax grew by 14.3%, from N36.2 billion to N41.4 billion for the period under review. Profit after tax grew by 56.3%, from N31.6 billion to N49.5 billion year on year.

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READ: Nigerian Breweries’ Q1 earnings report shows profit decreased by 31.4% to N5.5 billion

Operating expenses also increased by 0.9% y-o-y from N137.9 billion to N139.2 billion; while it suffered impairment charge for credit losses of N30.7 billion from N22.1 billion in Q2 2019. Its Gross earnings increased by 5.8% to N296.4 billion, from N280.3 billion in the period under review.

Divesting from its risk underwriting arm and its capital injection

FBN Holdings completely divested from its risk underwriting arm, completely selling off its 65% stake in FBN Insurance Ltd to Sanlam Emerging Markets (Proprietary) Ltd. effective from June 1st, 2020.

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According to the group, “we successfully divested from the underwriting (insurance) businesses, to focus on our banking operations. We are confident this will enhance greater value to our stakeholders and strengthen the Group’s resolve to consolidate its leadership of the banking sector.”

READ: STANBIC IBTC posts Profit After Tax of N45.2 billion in H1 2020

This single action did many things for the bank. Following the divestment, the holding capital, FBN Holdings, had injected equity capital of N25 billion into the bank, thereby boosting its overall Capital Adequacy Ratio to 16.5% (excluding profit for H1 2020). In a similar vein, the bank’s total assets was boosted by 14.9% year-to-date from ₦6.2 trillion as at Dec 2019 to ₦7.1 trillion in June, 2020. By pumping the required capital into the bank, it was able to effectively mitigate the regulatory requirements that many banks have struggled with over the past few months. Not only does it have a comfortable buffer against regulatory requirements; it has the available financial resources to look out for emerging business opportunities, and fully deepen its strengths in its core business areas.

READ; Nike stocks post gains, women’s apparel division grow by 200%

While the bank has everything to be thankful for, with the play of events; care should still be taken towards driving its growth objective. In truth, its financial position excluding the capital injection does not particularly reveal new strengths. Hence, a false sense of security, given the current economic challenges amidst the COVID-19 pandemic and all the challenges it births, like possible increase in impairment provisions, ailing investments, and so on, could have the company dissipating its newly injected capital.

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READ: UBA Plc H1’2020 results, a true reflection of its rightsizing decision? 

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For investors, while an amazing growth opportunity does exist especially given its new resources, the best bet is to hold as a dividend stock, patiently waiting for its long-term growth strategies to play out in the years to come.

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