Regulatory headwinds, rising competition and the Central Bank of Nigeria’s (CBN) planned bank recapitalisation programme may trigger a fresh wave of Mergers and Acquisitions (M&A) in the banking industry this year, findings by Saturday Telegraph show. According to analysts, while latest official data indicates that the country’s banking industry is in a strong position as Capital Adequacy Ratio (CAR) increased from 10.2 per cent in December 2017 to 15.5 per cent in September 2019 and the percentage of Non-Performing Loans (NPLs) declined from its high of 14.7 per cent in January 2017 to under 7 per cent as at October 2019.

The recent spate of regulatory measures occasioned by the apex bank’s efforts to get Deposit Money Banks (DMBs) to increase lending to the private sector, as well as competition from Fintech firms, are negatively impacting lenders’ earnings. In fact, in his firm’s, “Lagos Business School (LBS) November 2019 Executive Breakfast Presentation,” the Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, predicted: “Likely consolidation of the banking industry (and) increase in M&A deals.”

He said the country’s financial service architecture will witness, “significant shift,” adding that there would be more financial disintermediation as large corporate are showing increasing preference for raising capital directly from the capital market.

He noted that over N375 billion was raised from Commercial Papers (CPs) by non-bank financial institutions as at November last year and predicted that “formalisation of crowdfunding” would further increase pressure on bank earnings as: “SMEs which have in recent times been the focus of banks(especially Tier-2 banks) can now have alternative sources of funds aside bank loans.”

The FDC CEO made his presentation in November last year amid widespread speculation that measures introduced by the Central Bank of Nigeria (CBN) to get DMBs to reduce their investments in fixed income instruments such as Treasury Bills (yields are now in single digits) and to channel the funds into lending to the private sector would hurt lenders’ profits. However, since Rewane made the M&A forecast for the industry, the business environment has become even tougher for DMBs.

Specifically, on December 22 last year, the CBN unveiled a new guide to charges by banks and other financial institutions, which took effect from January 1, 2020 and saw the apex bank significantly reducing a lot of charges and fees that financial institutions are allowed to impose on their customers. For instance, the withdrawal fee charge on extended use of other banks’ Automated Teller Machines (ATM) was reduced from N65 to N35 and the Card Maintenance Fee on all cards linked to current accounts was scrapped. While the development was clearly good news for consumers of financial products, analysts said it would lead to a drop in banks’ fee income. According to analysts at CardinalStone Research, the CBN move will particularly hurt DMBs because the lenders have been expected to increase their fee-based earnings to make up for the looming drop in interest income occasioned by lower Treasury Bill yields.

The analysts said: “On a broad basis, the new guideline is likely to be negative for Nigerian banks given its potential drag on fee-based earnings. Prior to the new guideline, we had expected banks to boost fee-based earnings in order to offset the potential compression in interest income that could be stoked by lower yields.

“This view was aided by recent investments in e-business channels and greater focus on retail strategies across our coverage banks. Notably, as at 9M’19, fee and commission income accounted for 57.0 per cent of total noninterest income (on average) across our coverage.

“An adjustment for potential non-recurring gains increases the contribution of fee-based income to about 74.0 per cent on average, highlighting its criticality to non-interest income (NII) growth.”

Similarly, in a recent note, analysts at Cowry Asset Management Limited predicted that the reduction in bank charges coupled with the slump in T-Bills yields will impact DMBs’ capacity to pay higher dividends. Indeed, they advised that: “Investors should make cautious investment in banks, especially Tier – 2 banks, as their capacity to sustain or pay higher dividend may have been dented.”

They, however, said they expect lenders – especially the Tier 1 banks – to have the capacity to survive the tough environment. The analysts said: “It appears that the banks have been caught in the middle of their regulator’s unending policies, which it has continued to churn out in order to support the Federal Government in its quest to boost economic growth.

“Also it’s a friendly fire on the banks as CBN feels there is an urgent need to protect customer’s purse in order to bring to bear its financial inclusion objective.

“In the middle of this regulatory shake up, Deposit Money Banks’ (DMBs) income lines would be hit at almost every end. Banks’ interest income is set to decline amid lower yield environment; more so, their noninterest income lines should suffer the same fate as bank charges are cut – beginning from January 1, 2020.

“However, not all hope is lost given the nature of banks, especially Tier-1 banks, in finding a way to navigate tough environment.”

Industry watchers believe that the reported retrenchment of staff carried out by some banks in the last few days is an indication that the lenders are taking steps to ensure that they remain profitable. Beside the tough business environment, analysts say that the lenders could also be getting prepared for the recapitalisation of the industry which the CBN said it intends to carry out.

CBN Governor, Mr. Godwin Emefiele, had disclosed in June last year, while unveiling his second term agenda , that going by the critical developmental role the apex bank would want DMBs to play between 2019 and 2024, it had become imperative to demand their recapitalisation as their current capital could no longer finance large transactions. He said: “In the next five years, we intend to pursue a programme of recapitalising the banking industry so as to position Nigerian banks among the top 500 in the world.

Banks will, therefore, be required to maintain a higher level of capital, as well as liquid assets in order to reduce the impact of an economic crisis on the financial system.

“Recall that it was Governor (Chukwuma) Soludo in 2004 that did the last recapitalisation we had. He moved the capitalisation from N2 billion to N25 billion. And I must commend those efforts because it resulted in positioning Nigerian banks not only in Africa but among the top banks in the world in terms of capitalisation.

“It also helps to increase the banking industry’s capacity to take on large transactions. And those are some of the things we badly need today. So, if you relate N25billion with 2004 exchange rate which was about N100 (to a dollar), N25 billion was about $250 million.

“Today, if you relate N25bn at N360 (to a dollar) you will see that it is substantially lower than $75 million. So, what we are trying to say is that the recapitalisation has weakened and there is a need for us to say it is time to recapitalise the banks again.

“It’s a policy thrust which would be discussed at the committee of governors’ meeting and of course, the framework for the recapitalisation of Nigerian banks would be unfolded for the whole world in due course,” he stated.

It would be recalled that in a move that took industry watchers by surprise, two of the nation’s biggest lenders – Access Bank and Diamond Bank – sealed a M&A deal in April last year , thereby creating Nigeria’s largest bank, with about 29 million customers and 15per cent of sector assets. (Saturday Telegraph)