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COMMENTARY: Moody’s changes outlook on Nigerian banking sector to negative

The outbreak of COVID-19 and the sharp downturn in crude oil prices have continued to stoke fears of a further devaluation in the Naira.

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Q1 2020, Disrupting Nigerian banks, Evolution of Nigerian banks in 59-years , GTB, UBA, Zenith, Access Banks’ salary advance loans, Can a company operate without a website in 2019? , Banks refund N3.09 billion to customers over claims on excess charges, fraud, others  , Bank CEOs applaud NCC’s decision to suspend USSD charges, GTBank, Zenith, Access, FBN, 10 others spend over N8 billion on CSR, Banking: Evolving trends in the bankers’ market, GTBank, Access, FBNH, Standard Chartered wrestle over women entrepreneurs , GTBank, Access Bank, Zenith, FBN, 16 others disburse CBN’s N610.4 billion to farmers , Credit to government declines, as Credit to private sector hits N25.8 trillion, Banking sector NPLs down, loans up, Non-Performing Loans in Agriculture, construction, others rose to N143.76 billion, Asset seizure: Banks begins recovery of N6.125 trillion borrowed to the oil sector, Customer Experience: GTB, FCMB, Citibank, others emerge best banks in 2019, Nigeria’s top 5 banks spent more than N40 billion on adverts in 2019, Nigerian banks face risky future over low oil prices, coronavirus, Testing the financial strength of Nigerian banks

According to news reports, Moody’s Investors Service had earlier this week changed its outlook for Nigeria’s banking system from stable to negative. Moody’s rating agency highlighted that the change reflects its view that banks will face weakening loan quality and foreign-currency liquidity challenges as depressed oil prices and the global pandemic weigh on Nigeria’s economy.

The outbreak of COVID-19 and the sharp downturn in crude oil prices, which have accelerated capital flow reversals, continue to stoke fears of a further devaluation in the Naira. We say further devaluation because the CBN had in March moved the official exchange rate from N307/US$1 to N360/US$1. At the Investors and Exporters Window (I & E), the CBN also adjusted the NGN peg upwards by 5.7%, as it raised its intervention rate to N380 from N366. Depressed oil prices and subsequent devaluation affect banks in a number of ways.

First is asset quality: A few sectors show more vulnerability to depressed oil prices and devaluation in the local currency and as such bank lending to these sectors will most likely show signs of strain. One of such sectors is the oil and gas upstream/midstream sector. In conversations with banks over the past few weeks, we understand that some banks like Guaranty Trust Bank have hedged their oil and gas exposure over several months while many others believe that it will be possible to restructure these loans – apparently with little effect on asset quality in the short term.

Second is capital erosion: Devaluation, in theory, challenges capital adequacy ratios (CAR) because the Naira-equivalent value of risk-weighted assets (RWA) rises as this includes foreign currency loans. However, the weight of foreign currency loans in RWAs is for the most part moderate (35%-45%), and some banks like FBNH and Guaranty Trust Bank will likely make windfall gains from net long FX positions which in turn boost capital. Some banks also have some of their Tier-2 capital in foreign currencies and will, therefore, see an increase in Tier-2 capital if a devaluation occurs.

(READ MORE: Nigerian banking stocks ignore red flags, boost Nigeria Stock Market)

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However, the CBN rule which restricts Tier-2 capital to only 33.3% of Tier-1 capital implies that not all the increase would qualify for the total capital adequacy (Tier-1 plus Tier-2) computation. Overall, we see moderate erosion in CAR for our coverage banks.

Finally, foreign currency liquidity: Borrowings made by banks in US dollars are problematic under a devaluation scenario. As such, banks need to have to perform US dollar assets in order to receive dollars with which to service their own US dollar borrowings. The greater the under performance of US dollar assets in cash terms (for example, re-scheduled US dollar loans to the oil & gas sector, with grace periods during which banks do not receive cash) the higher the likelihood that banks will have to find other sources of US dollars to service their own USD denominated borrowings. An extreme case is when a bank decides to purchase US dollars with Naira at unfavorable rates in order to service a US dollar obligation. We assume however that many banks have access to the supranational lenders, and to development banks for refinancing, which should limit the possibility of occurrence of the extreme scenario.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission.

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Coronavirus

FG yet to purchase Covid-19 vaccines – Minister of State for Health

According to a disclosure made by the Minister of State for Health, the FG is yet to purchase any COVID-19 vaccine.

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NPHCDA to address infrastructural gaps in COVID-19 vaccine supply, FG to focus on procurement of Covid-19 vaccine in first quarter 2021

The Federal Government has said that it is yet to purchase any Covid-19 vaccines as the country is still assessing the prices of different shots, their availability and the logistics required for a nationwide roll-out.

This is coming at a time when developed economies are rolling out the vaccines in their countries and concerns have been raised about the availability of the Covid-19 doses in the African continent.

This disclosure was made by the Minister of State for Health Adeleke Olurunnimbe Mamora, during a telephone interview with Bloomberg.

What the Minister of State for Health is saying

Mamora said that once the government determines which vaccines are accessible and affordable, authorities then have to consider storage and distribution issues as they prepare to give shots to 200 million people.

He said, “We haven’t made any purchases at this point in time.’’ He added that the government expects to have a definitive plan by the end of January.

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Nigeria is working with the World Health Organization backed COVAX programme and hopes to receive its first doses in January. The Minister for Finance, Budget and National Planning, Zainab Ahmed, had said that the country is working on what type and quantity of Covid-19 vaccines to procure and financial provision will be made in the 2021 budget for the vaccines.

COVAX is a global initiative backed by the World Health Organization which aims to provide equitable access to Covid-19 vaccines, especially to poor countries.

What you should know

  • It can be recalled that Bloomberg had reported that experts and a state governor had expressed doubts about the ambitious plan by Nigeria to vaccinate as much as 40% of its population this year due to lack of resources and infrastructure.
  • The Chief Executive Officer of Nigeria’s National Primary Health Care Development Agency, Faisal Shuaib, said on Thursday the country expects to receive 100,000 doses of Pfizer Inc’s shot at the end of January through the Covax initiative.
  • Nigeria has officially reported 107,345 Covid-19 cases, with 1,413 casualties, but testing is not easily accessible for most people, with only about 1.1 million tests conducted so far.

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Economy & Politics

Nigerian government spends equivalent of 83% of revenue to service debt in 2020

The Federal Government of Nigeria achieved a debt service to revenue ratio of 83% in 2020.

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The Federal Government of Nigeria achieved a debt service to revenue ratio of 83% in 2020. This is according to the information contained in the budget implementation report of the government for the year ended December 2020.

According to the data seen by Nairametrics, total revenue earned in 2020 was N3.93 trillion representing a 27% drop from the target revenues of N5.365 trillion. However, debt service for the year was a sum of N3.26 trillion or 82.9% of revenue.

Nigeria’s debt service cost of N3.26 trillion has now dwarfed the N1.7 trillion spent on capital expenditure of N1.7 trillion incurred in 2020. This is also the highest debt service paid by the Federal Government since we started tracking this data in 2009.

The total public debt (External and Domestic) balance carried by Nigeria as of September 2020 stood at N32.22 trillion ($84.57 billion). Included in the total debt is a domestic debt of about N15.8 trillion.

 

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What this means: Nigeria’s debt to GDP ratio is estimated at about 22%, one of the lowest in the world and much below what is obtainable in most emerging markets.

  • However, the challenge has always been the debt service to revenue ratio, a metric that reveals whether the government is generating enough revenues to pay down its debts as they mature.
  • Since the first recession experienced in 2016, Nigeria has struggled with higher debt service to revenue ratio as revenues slid in direct correlation with the fall in oil prices.
  • Nigeria’s government spent about N2.45 trillion in debt service in 2019 out of total revenue of N4.1 trillion or 59.6% debt service to revenue ratio.
  • At 83%, 2020 ranks as the highest debt service to revenue ratio we have incurred. Before now it was 2017 with 61.6%.

Breakdown of what debts were serviced

The following amount was spent on debt service during the year

  • To service domestic debt, the government spent N1.755 trillion in 2020 as against a budget of N1.87 trillion.
  • For foreign debts, a sum of N553 billion was spent against a target budget of N805.47 billion. The drop here is likely a result of lower interest rates on foreign borrowing as well as very limited borrowing from the foreign debt market during the year.
  • The government only contributed N4.58 billion into its sinking fund instead of the budgeted N272.9 billion.
  • The sinking fund is required to set aside funds that will be used to pay down on other loans such as bonds when they mature in the future.
  • Finally, a sum of N912.57 trillion was spent on servicing CBN’s loans, granted via its Ways and Means provisions.
  • Nairametrics reported last week that a total sum of N2.8 trillion was extended by the CBN to the FG as Ways and Means.

What happens next: In 2021, the government projects a debt service of N3.1 trillion against revenue of N6.6 trillion or a debt service to revenue ratio of 46.9%.

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  • The government plans to spend N4.3 trillion on capital expenditure during the year.

 

 

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Tech News

Top 10 Nigerian tech companies and capital raised in 2020

These are the top 10 tech companies and the capital they raised in 2020.

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Startup funding in Africa, Fintech, Disrupt Africa

African startups raised over $1 billion in funding in 2020, with Nigerian startups raising 17% of this amount – $55.37million in Q1 2o2o and $28.35million in Q2 2020, according to Techpoint.

These are the top 10 rankings of the highest fundraisers for 2020.

Flutterwave

The startup provides digital payments infrastructure and services which enable global merchants, payment service providers, and pan-African banks to accept and process payments across various channels.

It raised a $35M Series-B round led by US venture capital firms Greycroft and eVentures in January 2020. The funding was invested in technology and business development to grow market share in the countries it operates in.

54gene

The startup is equalizing precision medicine by including underrepresented Africans in global genomics research. It raised $15M in a Series A funding round in April 2020 led by Adjuvant Capital – a life sciences fund backed by the International Finance Corporation, Novartis, and the Bill & Melinda Gates Foundation.

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These new funds will be used to address the gap that exists in precision medicine for people on the African continent.

Aella Credit

The startup is a one-stop app for all your financial needs. Aella makes it super easy for anyone to borrow, invest, and make payments. It secured a $10 million debt financing round from a Singaporean company – HQ Financial Group.

The new capital raised from Singapore is expected to facilitate the credit company’s effort to provide financial inclusion to many more of the people who are currently unbanked across Nigeria, West Africa, and other emerging markets.

Helium Health

The startup has become the leading provider of full-service technology solutions for healthcare stakeholders in Africa. It raised a $10 million Series A round in April 2020.

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Global Ventures and Africa Healthcare Master fund (AAIC) co-led the investment round. Helium plans to use the latest funding round to hire and expand to North and East Africa, including Kenya, Rwanda, Uganda, and Morocco.

Kuda Bank

The startup provides a full banking service on your smartphone. It secured a US$10 million seed round in November 2020 – the biggest seed round ever to be raised in Africa, led by Target Global with participation from Entrée Capital and SBI Investment.

The funding will be used to help accelerate its growth plans and keep up with customer demand. Specifically, funds will be used for key hires, product development, and to expand operations across Africa.

Trade Depot

The startup is a Nigerian B2B eCommerce company that utilizes an end-to-end distribution platform aimed at connecting the world’s top consumer goods companies directly to retailers in Africa.

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It raised $10-million in a pre-Series B equity round co-led by Partech, International Finance Corporation, Women Entrepreneurs Finance Initiative (We-Fi), and MSA Capital in July 2020.

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The new investment will enable Trade Depot to continue connecting international brands with small businesses in Nigeria, expand into other African cities, launch a suite of financial products, and credit facilities aimed at supporting its retailers.

Field Intelligence

The startup is helping governments and businesses make good on the promise of healthcare in the fastest-growing parts of the world by making the pharmaceutical supply chain radically simple, affordable, and easily accessible.

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It raised a $3.6 million Series A round in March 2020, led by Blue Haven Initiative, with investors including Newtown Partners via the Imperial Venture Fund and Accion Venture Lab.

The investment will be used to scale Shelf Life expansion throughout Nigeria and Kenya, as well as the development of additional services for Shelf Life clients and their patients.

MedSaf

The startup connects suppliers to hospitals and pharmacies directly to make the pharmaceutical supply chain more efficient. The health start-up raised $3.5M in a seed funding round in December 2020.  It will use this funding to expand to other African countries.

Auto Chek

The company is an automotive technology company that aims to build solutions for the African market. It raised $3.4 million in pre-seed funding round in November 2020, co-led by TLcom Capital and 4DX with inclusion from Golden Palm Investments, Lateral Capital, Kepple Africa Ventures.

Auto Chek will use the investment to grow its Nigerian and Ghanaian markets, invest in its tech, and grow its team.

Despite the ravaging impact of Covid-19, Nigerian tech start-ups raised millions of dollars in funding. We hope to see more investors in the first quarter of 2021.

Rensource Energy

The startup allows qualifying companies throughout Nigeria and West Africa to start selling Power-as-a-Service (PaaS) to their customers.

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It raised $3 million from Proparco, with the support of the European Union under the Africa Renewable Energy Scale-Up facility (ARE Scale-Up). The funding will be used to contribute to facilitating energy access in the context of a significant and growing energy gap in Nigeria and support the development of innovative solar energy solutions.

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