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Insurance: NAICOM extends recapitalization deadline

In May 2019, NAICOM re-introduced the previously suspended recapitalization exercise albeit with more stringent capital requirements.

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NAICOM, Recapitalisation: 44 firms get NAICOM’s nod , NAICOM boss makes case for recapitalisation, insists the exercise will solidify insurance sector , NAICOM extends recapitalisation deadline for insurance companies to meet new capital base, Due to lack of ‘process’, NAICOM says no insurance firm has met recapitalisation requirement, Insurance: Recapitalisation exercise sets consolidation in motion, Insurance firms are reportedly selling off assets to meet NAICOM’s recapitalisation deadline, Insurance: NAICOM mulls extension of recapitalization exercise

We recall that in May 2019, NAICOM re-introduced the previously suspended recapitalization exercise albeit with more stringent capital requirements. Under the new capitalisation provisions, life insurance firms are required to have a minimum paid-up capital of N8.o billion from N2.0 billion previously while firms who engage in general insurance business must now have a new minimum paid-up capital of N10.0 billion from N3.0 billion previously.

Composite insurance firms must have a new regulatory capital of N18.0 billion from N5.0 billion previously while reinsurance businesses are now required to have a minimum capital of N20.0 billion from N10.0 billion previously.

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Recapitalisation: 26 firms get NAICOM's approval

In our opinion, the extension of the deadline was anticipated as many of the concerned insurance operators are struggling to put together a proper plan to raise the needed capital given many of them are struggling to convince investors to inject new funds in businesses that are largely underperforming.

Furthermore, many operators, who have submitted their proposed plans, are yet to get “No Objection” approvals from the commission. We highlight that the length of time required to close capital raise transactions in Nigeria also made the initial deadline untenable.

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On the positive side, we think this provides most insurance operators adequate time to fashion out plans as well as convince investors to put more funds into their businesses particularly as 2019 scorecards would be available to pitch performance and future prospects.

[READ MORE: 2019: Foreign investors remain net sellers of Nigerian equities)

Nevertheless, we still think many insurance operators would struggle to raise the necessary capital as several of them currently have negative book value of equity while industry fundamentals do not portend the possibility of unlocking the potentials in the industry at least in the short to medium term.

That said, we anticipate that in 2020, there would likely be a flurry of mergers and acquisitions in the insurance industry while some players who are unable to get the backing of their shareholders may lose their licenses or face hostile takeovers. Meanwhile, we believe operators who manage to scale the recapitalization process will have better growth prospects as they would be in a better position to undertake big ticket transactions.

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CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Wealth.ng

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.

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Columnists

Reduction in PMS: A nod to the deregulation of the downstream sector?

The Presidency yesterday announced a reduction in the price of Premium Motor Spirit (PMS) to N125 from the current price of N145.

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FG battles 6 oil firms for failure to remit N20 trillion , ExxonMobil, Shell, Chevron delay $58.4 billion oil and gas investment in Nigeria, Crude Oil: Nigeria’s oil production slips for the third consecutive month , Tax reform, policy uncertainty to cause oil drop as foreign firms look outside Nigeria, Nigeria plans to support oil price with lower production cost per barrel, Oil price slumps further to $30 pb, as Nigeria grapples with high production cost, Reduction in PMS: A nod to the deregulation of the downstream sector?

The Presidency yesterday announced a reduction in the price of Premium Motor Spirit (PMS) to N125 from the current price of N145, necessitated by the fall in crude oil prices. Brent crude oil prices have fallen by c.64% since the beginning of the year, implying a reduction in the landing cost of PMS.

The pricing template puts the total landing cost for a litre of petrol at Nigerian port at N137/litre as of February 12, 2020, when Brent crude price stood at US$55.79/bb. This has however declined to N64.33/L as of 16 March 2020 following the dip in crude oil price to US$30/bbl.

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Reduction in PMS: A nod to the deregulation of the downstream sector?

The decision has been lauded by many as a signal towards deregulation of the downstream sector. While we see the rationale behind the move, we are concerned that the government is giving up an opportunity to prop up its already slumped revenue prospect given the significant drop in crude price. That said, the decrease will likely ease inflationary pressures at a time when inflation is on the rise. Headline inflation stood at 12.2% y/y in February, up from 12.13% in January.

READ MORE: Nigeria in trouble as rising subsidy cost exacerbates revenue crisis

On May 11, 2016, petrol pump prices were hiked by around 68% from N87/litre to N145/litre and many assumed this signalled full deregulation. This wasn’t the case however as the subsidy regime was still in place. The exchange rate factored into the landed cost of fuel was between N280 and N285/US$1.

A steep devaluation in the currency and an increase in crude prices in the international market, implied an increase in the landing cost which necessitated the continuation of the subsidy regime, though now booked as under-recovery losses in the books of NNPC.

The removal of the subsidy is a critical free-market reform, in our view, and we believe it is beneficial to the economy and government finances, though it will almost certainly put pressure on consumers and small businesses.

READ MORE: FG to reduce N1.5 trillion from 2020 budget due to coronavirus

Beyond the impact on government revenues, the removal of the subsidy also removes disincentives to refine petroleum product and may improve the balance of payments through import substitution. We, however, refrain from labeling this price reduction move as any sign of deregulation as the price of fuel is likely to remain regulated in our view.

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CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.

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Columnists

Economy: Domestic investors hold sway in January

The NSE data on domestic and foreign investor participation for January revealed that activity level in the stock market was high.

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Bourse, NSE in 2019, events & outlook, Foreign portfolio transactions drop by N280 billion as foreign investors remain net sellers of Nigerian equities , 2020 Nigerian Equities Outlook: Breaking the Jinx?, Equities: Foreign investors remain net sellers for second consecutive year , Investors part with N152.1 billion as bearish trade extends, Stocks close February in deep red as investment options dry up for Nigerians, Economy: Domestic investors hold sway in January

The Nigerian Stock Exchange (NSE) data on domestic and foreign investor participation for January revealed that activity level in the stock market was high, as total value of transactions grew 84% m/m to N235.5 billion.

The sturdy growth in the level of transactions was driven largely by domestic investors, as the value of transactions executed rose by 155% m/m to N165.1 billion from N64.8 billion in December 2019.

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NSE moves to protect investors’ data , Ekiti, Osun, Delta, Imo, 9 others raise over N500 billion bonds in 10 years, Equities: Foreign investors remain net sellers of Nigerian equities, Top 10 stockbroking firms traded N1.35 trillion on stocks in 2019, Equities: A bullish run to start the year, NSE to sustain growth in 2020, CEO assures

We believe the strong participation of domestic investors was spurred by buoyant system liquidity following the restriction placed by the CBN on individuals and Pension Fund Administrators from investing in OMO bills. As a result, this segment of the market could no longer invest funds from maturing OMO bills, leading to a surge in the amount of the funds chasing existing asset classes.

We recall that there was a lot of buying interest in high dividend yield stocks particularly in the banking sector with tickers such as UBA, ZENITH, GUARANTY & FMN recording significant gains.

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Despite the improvement in the value of transactions executed by foreign investors (up 11% m/m to N70.3 billion), we highlight that foreign investors’ outflows from the local bourse outpaced inflows for the fourth consecutive month. Specifically, foreign investors’ net outflows rose to N22.7 billion in January compared to N19.8 billion in December 2019. In our view, this reflects the fact that foreign investors interest in the local bourse remains weak despite attractive valuations.

[READ MORE: CBN announces initial policy response to COVID-19)

We think the absence of structural reforms in strengthening the resilience of the domestic economy, rising vulnerabilities to external shocks, heightened uncertainty in the banking sector given the flurry of regulatory guidelines from the CBN are fundamental issues inhibiting foreign investors appetite for Nigerian equities.

Considering the outbreak of coronavirus (COVID-19) which has disrupted global supply chain and the downturn in oil prices (crude oil prices are down c.50% from US$68.91/b at the start of the year), we expect foreign investors to remain averse towards Nigerian equities.

With respect to domestic investors, we expect subdued interest in the local bourse given heightened concerns around a currency devaluation and the tendency to want to hold foreign currency. Accordingly, we envisage that domestic investors will trade cautiously with many remaining on the sidelines.

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Wealth.ng

CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

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NIGERIA.

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Business News

CBN announces initial policy response to COVID-19

In light of the rampaging impact of the COVID-19 pandemic on global supply chains, CBN announced its initial policy response to the pandemic.

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CBN-Governor-Emefiele, Investors’ and Exporters’ forex window aided Naira stability – Emefiele , external reserves, Financial Inclusion: CBN licensed 15 mobile money operators – Emefiele , Rates continue to decline as banks struggle to meet CBN’s 65% minimum LDR, CBN releases new guidelines, to fine banks N2 million over customers’ complaint , CBN: FG fell short of monthly allocated collected revenue by N388 billion, CBN issues new rule for use of PoS, merchants to face sanction after deadline, CBN may devalue naira in 2020 as experts highlight red flags in the economy, CBN appoints and redeploys directors within its ranks, Banks look to lending rates for revenue, as slash on e-transaction charges affect operations, CBN discloses currency in circulation worth N2.44 trillion, CBN to commence recycling of mutilated naira notes, Agriculture: CBN's revised policy on the dairy industry, CBN condemns foreign money transfers to Nigeria, Experts outline effect of CBN’s longer term contract, Bank’s lending rates decline albeit slower than expected, CBN releases new capital base, sanctions for Microfinance Banks, CBN reveals banks’ foreign assets rise to N14.19 trillion in 2019, CBN insists on no devaluation, threatens to sanction those responsible for false speculations, CBN considers interest rate cut as trade, economy decline over Coronavirus, Defending the naira at a cost, CBN announces initial policy response to COVID-19, CBN stops oil companies from selling dollar to NNPC, here’s why, Amid Coronavirus spread, CBN directs staff to stay at home, External reserves to fall below $30 billion, more forex restrictions expected, UPDATE: Fitch downgrades Nigeria's IDR to "B", says CBN's remedial policy not enough, What constitutes Nigeria’s external reserves?, CBN to create housing funds for developers, Nigeria Trade: CBN reviews exchange rate for cargo imports, Nigerian Fintechs re-strategize with CBNs’ postponement of revised MFB license regulations

In light of the rampaging impact of the COVID-19 pandemic on global supply chains, demand shocks and consequently impact on liquidity and growth prospects, the Central Bank of Nigeria (CBN) announced its initial policy response to the pandemic.

This comes ahead of its Monetary Policy meeting on March 23 and 24. Below are highlights of the bank’s communique:

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  • All CBN intervention facilities are hereby granted a further moratorium of one year on all principal repayments effective March 1, 2020.
  • Interest rates on all applicable CBN intervention facilities are hereby reduced from 9.0% to 5.0% for 1 year effective March 1, 2020.
  • The CBN establishes a N50 billion targeted credit facility through the NIRSAL microfinance bank for households and SMEs vulnerable to the COVID-19 pandemic.
  • The CBN hereby opens intervention facilities and loans to pharmaceutical companies intending to expand operations and set up drug manufacturing plants.
  • The CBN hereby grants Deposit Money Banks leave to consider temporary and time-limited restructuring of the tenor and loan terms for businesses and households most affected by the outbreak of COVID-19.
  • Strengthening of the CBN’s LDR policy to support credit growth. The CBN would further support industry funding levels to maintain DMB’s capacity to direct credit to individuals, households and businesses.

READ MORE: Oil price crash, Coronavirus: The trouble that lies ahead for Nigeria

Coronavirus blamed for Monday’s negative performance by Nigerian stocks, Experiment centre requests volunteers to infect with coronavirus and pay them N1.6 million, Airlines cut down capacity to raise capital, as Coronavirus takes a continuous hit at their revenue

We recognize that the COVID-19 pandemic has impacted global supply chains and created demand shocks. Consequently, this has impacted revenue and created cashflow constraints for companies vulnerable to the spillovers of the outbreak.

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Granted some Nigerian companies, which rely on supplies from China, may have met with tough times, we believe the most serious negative impact of the outbreak on the Nigerian economy stems from weaker oil prices and pressured external conditions which have led to rising FPI outflows and consequently exchange rate panic. These pressures have significantly raised the risk of an economic slowdown and a possible recession in the medium term.

In light of this, we don’t think the CBN’s policy response addresses the key risks faced by the Nigerian economy from the COVID-19 outbreak. The policies highlighted above are geared towards freeing up more liquidity into the financial system and relaxing debt covenants for companies rather than tackling exchange rate concerns.

We note the CBN has earlier stated it believed market fundamentals do not support a devaluation. Thus, we do not expect any major reaction from the apex bank on that front.

READ ALSO: REMINDER: Nationwide implementation of cashless policy starts April 1st

Nevertheless, we think the policies will be beneficial for companies who currently enjoy CBN intervention loans. With an extra 1-year moratorium and lower interest rate (from 9.0% to 5.0%), these companies would enjoy improved liquidity. In addition, the CBN’s regulatory forbearance on loan restructuring would further support credit quality and prevent a credit crunch in the event of a protracted low oil price environment.

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_______________________________________________________________________

Wealth.ng

CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

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NIGERIA.

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