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Shedding over N4 trillion of toxic debt to  the state-run AMCON starting in 2010 was the first step in a cycle for Nigerian banks which has now come full circle in that still subdued impairment charges have neatly correlated with rising ROEs and improved capital adequacy ratios (CAR)–now up sector-wide to  over 17 percent from sub-10 percent levels  two years ago–that reflect, in part, lower risk weighted assets–once a headwind but now collateral for high yield paper that[alongside sticky money market rates] pads net-interest margins as well as overall net interest income in the face of suddenly sluggish credit growth (a phenomenon the central bank (CBN) labeled this spring as “indicative of a disturbing trend of growth in lending to States and Local governments at the expense of the core private sector”, though as RenCap analysts point out roughly 80 percent of Nigeria’s private credit goes to sectors of the economy that account for ~23 percent of real GDP growth).

Banks’ role in developing the real economy (read providing credit) comes concurrent, however, with a continued drive to (arguably) over-provision, seen for example in Diamond Bank’s 1H12 results wherein provisioning rose 18.3 percent q/q against an annual impairment decline of roughly 10 percent–an example of the differences stemming from the newly adopted International Financial Reporting Standards (IFRS), which replaced Generally Accepted Accounting Principles (GAAP) and has had a direct impact on lowering the aforementioned impairments at certain banks while actually raising required provisions at others: analysts stated that First Bank , Zenith and UBA all saw impairment charges decline between 20-38%, for instance (in essence the method of provisioning is based upon an informed rather than prescribed rate assessment process).  Yet to what extent banks build out and/or adopt the capacity to leverage the new standard standard and moreover apply it effectively to future asset buildout is just the sort of “sustainable change” alluded to by the CBN that will define and ultimately differentiate Nigerian banks once general  impairment drivers disappear from earnings and funding profiles become more competitive.   Moreover,  some pundits also fret about how the IFRS mark-to-market ethos will impact various [hitherto opaque] credit portfolios, especially given how counter-party credit risk will imediately be passed onto balance sheets and require offsetting flexibility in reserving.

Alongside overall asset and non-interest income growth, Fitch wrote last fall that “cost management [can be] expected to take on increased focus” within the Nigerian banking sector; indeed, most explictly this sort of “efficiency”  (often proxied by non-interest expenses as compared with revenue or in some cases total assets) may be magnified given the fine line between containing risk and capturing its returns inherent to a business model that post-Lehman and under Basel III looks to discourage rather than encourage it in the first place.  Touting falling NPLs and higher capital levels  as a sign of “strength” is thus somewhat misguided.   A recent paper in fact (“Effect of Capital Adequacy on the Profitability of the Nigerian Banking Sector”) reiterates the “non-significance between CAR and selected bank profitability and performance metrics” while suggesting regulators focus rather on “intrinsic elements of bank operational activates” in terms of cultivating stability.  For Nigeria’s banks, the work has just begun.


The Bank of Thailand’s decision to keep its key, one-day bond repurchase rate (1.75%) unchanged–effectively an attempt to ease the rampant baht appreciation (it recently hit a 13-year high versus the dollar)/pressure on exports discussed here earlier–followed its decision last week, per Bloomberg, to “[scrap] a tax exemption for foreign investors in domestic bonds to slow capital inflows that have pushed up emerging-market currencies.”  Yet according to Santitarn Sathirathai, a Singapore-based economist at Credit Suisse Group AG, “it’s only an exception to the trend of hiking rates.”  Indeed, late last month the state’s finance ministry opined that the rate “may climb to 2 percent by the end of the year and 3 percent next year.”  Yet as long as core (1.1% y-o-y) consumer price inflation remains removed from the high-end of the Bank’s target range of as much as 3%, and state price-influence remains in tact (per Businessweek, in June “the government extended state subsidies on mass transportation and energy costs for six months, while the commerce ministry controled prices of key consumer products to help reduce the public’s burden following political clashes in the second quarter that killed at least 89 people”), it’s conceivable that rates stay stagnant.  That said, as The Economist pointed out two weeks ago while citing a fascinating study authored by two economists at Goldman Sachs which looked at the pace at which central banks in emerging Asian economies built up reserves by buying foreign currency (and then scaled the absolute amounts in question by the country’s base money supply in order to determine a net effect), Thailand–along with Malaysia–have had the most “appreciation-friendly” regimes in Asia since 2006 (to boot, China’s intervention in relation to the size of its economy has been relatively small, the piece shows).  With all of this in mind, is a carry trade into baht-tied assets still viable, absence of the 15 percent tax exemption be damned?  Given the impending round of quantitative easing in at least one developed country, the emerging/frontier market flow may still have a ways to go.  “The Fed’s quantitative-easing speculation is back in focus and that means growing optimism of more inflows into Asia,” Hideki Hayashi, a global economist at Mizuho Securities Co. in Tokyo, told reporters today.

Regardless of your short-term view on rates, one way to currently play Thailand may still be through its bustling financial services sector.  During the first half of this year, for instance, the country’s banking sector realized 61b baht in net profits–a 42% increase y-o-y–on the back of strong net interest margins (NIM, i.e., the difference between interest income and interest expense expressed as a percentage of interest-bearing assets) and a continually declining non-performing loan– NPL–ratio (a proxy on underlying asset quality).  These results continued into the most recent earnings period, as analysts’ “outlook for Thai banks remains bright as strong loan growth should continue in the fourth quarter and into the start of next year after healthy economic growth.”   And while in theory rising rates may be NIM-negative (for liability-dominated balance sheets, a rising interest rate environment–and thus a flattening yield curve–suggest a given bank’s net interest margins will be comprimised given the cost of deposits outpacing asset yields), Suphachai Sophastienphong, chief economist at Siam City Bank, pointed out in August that in reality this is probably not the case:

“Empirical evidence in Thailand appears to contradict the prevailing orthodoxy that changes in interest rates and the slope of the yield curve (changes in the levels of long-term and short-term rates) will have significant impact on banks’ net interest margins.  Over the past half a decade net interest margins have been hovering around 3 percentage points, reflecting, in the view of many pundits, less-than-competitive pricing behaviour and inefficient intermediation–irrespective of the shape of the yield curve . . . Even in parts of the developed world, the correlation between bank profitability and the yield curve has weakened considerably over the past few decades thanks to deregulation, securitisation and the use of interest rate swap as well as other derivatives contracts.”

In order and by assets, Thailand’s biggest banks are Bangkok Bank, Krung Thai Bank, Kasikornbank and Siam Commercial Bank (the country’s oldest).

My piece from February’s Business Diary Botswana:
At the peak of the credit bubble, observers noted that a “swell of private equity buyers, solid corporate profits, the availability of cheap debt and robust liquidity” all underpinned a $4.5 trillion global boom in M&A, an industry in which both volume and value are historically positively correlated with GDP.  Yet the steadfast nature of that relationship may be in doubt–at least in terms of South Africa’s deal flow industry–if current projections prove accurate.  While the continent’s largest economy took a harder than expected hit during the global recession, due primarily to an unexpectedly pronounced plunge in manufacturing, as well as in the world’s demand for raw materials, prognostications for 2010 are generally positive.  Putting aside the IMF’s World Economic Outlook, released in October, which foresees fairly tepid growth of 1.7%, myriad analysts are quite bullish on the economy, drawing upon a host of indicators to support their optimism.  For example, Nicky Weimar, Senior Economist at Nedbank, highlights the buoyancy of the very same manufacturing and mining sectors which caused the country’s hasty downfall; after being pummeled at the end of 2008 and into the first half of 2009, the two showed marked improvement in the third quarter of 2009, though admittedly on the back of the ever-increasing BRIC (namely Chinese) appetite for commodity-based exports.  Other signs of comfort, she notes, include increased car sales figures (on a month-to-month basis) and improving trade activity and business confidence levels, including a two-point uptick in Decemeber’s Merchantec CEO Monfidence Index, a forward-looking survey of 100 executives measuring both current and expected conditions over the next six months.  The boldest projections come from Old Mutual Investment Group, a Southern Africa-based asset manager, who in mid-January predicted 3.7% expansion in 2010 following the summer’s World Cup, and 4% growth in 2011 against the backdrop of an inflation rate hovering somewhere “around the upper end” of the Reserve Bank’s 3-6% CPI target range.  “The combination of a recovery in consumer demand, ongoing robust public sector spending, an end to the cycle of destocking, moderate export gains and the World Cup Soccer, could combine to generate a surprisingly robust acceleration in growth during the middle quarters of 2010.  We could even see another interest rate cut from the Reserve Bank adding to the positive conditions, should inflation surprise on the downside and the rand remain strong,” opined Rian le Roux, its chief economist. 
Amidst such hope, however, is the stark reality of a continualy declining M&A market, which saw a 61% decrease by value in deals from the year before, and which Mergermarket, an industry intelligence service, expects to further languish in 2010 due largely to “increasing unemployment figures [that] have taken a substantial number of paying customers out of the economy, affecting sectors such as retail and manufacturing.”  In particular, the group noted, telecoms may have to “rethink growth strategies in the year ahead in light of the failed attempt to merger MTN and Bharti as well as pressure to lower tariffs due to government intervention and increased competition.”  That said, other industries may outperform despite a falling and corrective, pre-World Cup market that even most market bulls accept as a likely requisite for accelerated growth in latter quarters.  For instance, Standard Bank Group Ltd. and FirstRand Ltd., the country’s largest lenders and with Chinese ties, announced mid-month that they had registered an interest with Nigeria’s central bank (CBN) to investigate the possibility of acquiring distressed domestic lenders, something industry consolidation-seeking Nigerian authorities would readily embrace having decided last October to limit domestic banks’ market share to 20% and to prevent the country’s biggest lenders from acquiring stakes in the ten institutions that failed an August audit in which regulators determined that certain institutions had built up bad loans that left them too weakly capitalized to sustain their operations.  Financial M&A in Nigeria “makes sense,” London-based Silk Invest’s Baldwin Berges wrote to investors in January, given that “there are more than 150 million consumers in Nigeria (and 3-4 million new ones are born every year), and [that] most of these people [will] need to access the financial services industry for the first time. A genuine growth market that can [thus] be entered at a handsome discount.  This could well signal the beginning of the next major chapter in the development of Nigerian banking, a more joyful one for a change.”  Yet pricing such deals could be tricky.  “There is a fine balancing act taking place, however, as local banks assess these opportunities carefully so as not to get burnt by any risky assets they may acquire,” Mergermarket said.  To that extent, “there may be concern over the quality of the assets at distressed banks,” Henré Herselman, a derivatives trader at Johannesburg-based BoE Stockbrokers, told Vanguard, a Nigerian daily newspaper.  The upside of such a deal, however, will likely be too good to pass up.  From Standard Bank’s standpoint, an acquisition would at worst bolser its current presence in the country, while best case add market share and scale in its operations.  For FirstRand, entrance would mean the newfound birth of a Nigerian division (i.e., a “greenfields” approach) that would include both commercial and retail units, in a relatively mature environment that Sizwe Nxasana, its CEO and the first-ever black South African CEO of one of the country’s five largest banks, reiterated to CNBC Africa would already “suit mobile money transfers, investment-banking products and debt and equity capital markets products.”  Kokkie Kooyman, head of Sanlam Investment Management Global, offered a more sobering take on Nxasana’s vision.  In the firm’s “rush to expand into Africa,” FirstRand “might make bad acquisitions.  This then means they would have to put in lots of money in an effort to fix the acquired entity,” Kooyman said.  “It is going to be very tough for FirstRand.  Another problem would be establishing accounts and control functions in those countries. This means they would have to send talent out there, which will not be good for the company’s operations here at home.”  Nxasana, however, likely feels emboldened from the July partnership agreement he signed with China Construction Bank in order to help both companies win investment, corporate and project finance deals across Africa.   
Yet while analysts, fund managers and investors alike ultimately anticipate a relatively imminent flurry of action in Nigeria’s financial sector–events that, per the Financial Times, some observers think “will reshape not only the Nigerian banking system, but possibly the pan-African financial services landscape”–the exact timing and true breadth of such dealmaking is up in the air.  Last November, for example, the FT wrote that in naming Deutsche Bank as the leading adviser to “oversee the stability of the Nigerian financial sector,” the CBN was essentially signing off on the expected sale of at least nine Nigerian banks, and that “a number of UK, South African, domestic and Asian banks [had already] emerg[ed] as interested buyers.”  Moreover, South African ones, in light of their hitherto presence regionally and in conjunction with their generally strong balance sheets and ability to raise funds to finance large acquisitions, were assumed to have the upper hand in prospective talks.  That said, the pie at hand is finite, and the spoils aren’t exactly equitable in nature.  Speaking to Bloomberg last month, John Storey, an analyst at Bank of America-Merrill Lynch, labeled Guaranty Bank as “the best-in-class bank within Nigeria that provides exposure to upside surprises to the oil and macro-economic story,” while concluding that “Zenith, United Bank for Africa, Guaranty and FirstBank,” the four largest banks market capitalization, were the most attractive targets.  But bank executives would be wise to be choosy, especially amongst those not considered best in class, no matter the apparent discount.  As history has shown in at least one industry, namely the telecom market, Nigerian-based dealmaking can be fraught with perils.  For every MTN, there seems to be a Vodacom.  Caveat emptor. 

A recent FT piece quoted Bank of America Merrill Lynch analysts who estimate that Oman’s real economic growth rate will “continue to be relatively healthy, at 4% this year and 5.4% in 2010.”  And while down from an estimated 6.2% growth of last year, the bank concluded that “in the region this [growth] will be outdone only by the growth of gas-powered Qatar.”  Vis a vis the banking sector in particular, the article noted that “credit growth at commercial banks has slowed to 21% in June, down from a peak of 55% in 2008, but banks have continued to lend at a healthier clip than in most Gulf countries.”

Omani banking–and moreover the entire country’s economic recovery–runs through Bank Muscat–recently recommended by investment bank EFG Hermes, which cited the firm’s “commanding market share of 44% of the banking sector’s assets and 42% of the total banking sector’s deposits in Oman–almost 3x as big as its closest competitor.”  Of primary concern to the sector as a whole, however, remains the rising number of non-performing loans (NPL).  That said, Moody’s, a credit ratings agency, has given two reasons why Oman, and Bank Muscat in particular, are exceptions.  For instance, Oman’s banking sector as a whole is relatively stable, the agency noted, thanks to the country’s “relatively insular economy.”  Furthermore, Dubai Financial Group’s (DFG) recent 15% stake purchase in Bank Muscat, making it the second largest shareholder behind The Royal Court Affairs, a Sultanate of Oman’s governmental body, “is likely to contribute to the development of [the bank’s] franchise in the longer term both domestically and abroad.”

Government-owned National Bank of Abu Dhabi (NBAD), the nation’s second-largest bank by assets and largest by market value, was ranked among the 50 safest banks in the world in 2009, per Global Finance. The annual ratings compare the long-term credit ratings and total assets of the 500 largest banks around the world.  This on the heels of a second-quarter profit fall of 9.3% from a year ago (though net profits were up 17.7% from the first quarter).

Earlier this month NBAD formally announced its intentions to not only double its operations in Egypt, but also to expand into the “fast-growing” Indian market.  Earlier this year, the government-owned bank set up a representative office in Libya, with the aim of strengthening its presence in that country and North Africa.  And sources also suggested last month that the bank, which already has three outlets in Sudan, plans to be one of the principal financial institutions in that market.

While stocks in the Nigerian Stock Exchange (NSE) All-Share Index slid by 2.4% this week, and trading was halted in shares of the five banks that saw their CEOs unceremoniously sacked late last week, there may ultimately be attractive values forming among sound companies. For instance, Renaissance Capital, a Moscow-based investment bank, gave a ‘buy’ rating to Skye Bank last month and named it the ‘fastest growing tier-two Nigerian bank’. Of note, analysts remarked on the bank’s leading role in retail public sector collections for federal and state governments and tax authorities, as well as utilities, customs agencies, commercial subscriptions, regulatory institutions and examination bodies. Moreover, as noted earlier this year by RTC Capital, it is a “dominant player in Lagos state, Nigeria’s largest revenue collecting state. [And] with increased focus on diversifying revenue away from oil, this competence can only acquire more value.” Renaissance gave Skye a N12.20 share target price on the strength of the fact that it trades at a “2009 price earning ratio of 4.4x and 2009 p/b of 0.64x, representing discounts to our universe of Nigerian banks of 37% on 2009ep/b and 65% on 2009ep/b”. Yet Skye’s shares have suffered along with just about every other NSE listing, falling under N5 on Monday. Broad-based and swiftly declining asset values are as unsustainable as indiscriminate and rapidly rising ones, meaning that in the case of Nigerian stocks and financial services ones in particular, the likelihood of a significant market overshoot is probable. As Silk Invest’s Baldwin Berges noted this week about the country, “our view is that, in time, this clearly presents a fantastic opportunity for the alert and well informed investor to invest in well managed companies that find themselves valued well below their intrinsic value.”

Per The Jakarta Post, bank lending in Indonesia grew by just 2.09% from December last year to June compared with 16.26% a year earlier. Working capital loans slid the most, a sign of firms’ reluctance to expand, and banks also cutback loans out of fear that non-performing loans (NPL)–currently at 3.94%– would increase beyond the central bank’s accepted 5% threshold. Yet central to the reasons why businesses are reluctant to borrow, argues Erwin Aksa, chairman of the Indonesian Young Entrepreneurs Association, are their lenders’ self-imposed, high deposit rates. Large sovereign bond issuances have driven up the cost of money, as do the demands of large depositors–most of whom are state-owned companies, and which currently account for roughly one-half of banks’ third-party funds. The vicious cycle impairs liquidity, however, as banks fear above anything else a loss of depositors and a sudden run on funds. High deposit rates thus persist despite the fact that Bank Indonesia (BI) again slashed its benchmark rate (for the ninth-straight session) to 6.5% earlier this month, as banks, ever weary of NPLs, place a premium on large capital bases.

A legislative solution, however, may be in the works. Pundits point out that liquidity concerns would lessen if a proposed bill on the financial system safety net (JPSK)–which would allow the central bank to provide funds for banks in short supply of liquidity–is passed in the coming months by the House of Representatives. Last winter, however, the bill was widely shot down by lawmakers who argued that it would overly empower the government and create moral hazard.

National Bank of Abu Dhabi (NBAD), the country’s second-biggest bank by assets ($45 billion), will open branches in Jordan and Hong Kong before the year’s end, given the fact that there exists a strong contingent of citizens from said countries in the UAE. The Bank will also expand into Libya (one branch next year), Oman (three branches by 2010) and Egypt (twenty-two branches by 2013), according to Qamber al-Mulla, senior general manager, International Banking Division, who noted that further growth may lead the firm into the banking sectors of Morocco, Algeria, Lebanon and Turkey. The Bank beat analysts’ estimates earlier this week when it reported a 9.5% drop in second-quarter profit. Moreover, it told Bloomberg that it expects its loan book to grow to 15% in 2009 after a rise of 11.1% between June and December. That said, non-performing loans (NPL) across Gulf banks are expected to rise by 3-4x their current levels, Moody’s related in June, due to the economic slump and the falloff in property prices, the report notes.

Back in March, the Bank’s CEO, Michael H. Tomalin (pictured), noted in an interview that the “basic story of the UAE [was] a very strong story,” despite the ongoing property correction.” He also disputed the oft-repeated accusation that the region’s lenders were overzealous, even well-into the early stages of the world’s credit collapse. “I don’t think banks were imprudent in terms of developing the UAE.  The job of the banks in the country is to support the economy and to mobilize deposits on the one hand and apply them to projects on the other.  They also financed people and businesses so the economy could grow.  The economy was growing and what was happening was that the banks were following and supporting the growth in the economy,” he argued.  Perhaps his most salient point, however, touched on the difference between capital and liquidity:

“The [UAE’s financial system] system as a whole needs extra liquidity. The issue is liquidity, not capital. The capitalization of banks in the UAE, generally, is very strong. Banks in the UAE are very strong banks, they have very strong capital positions, there is nothing wrong with their capital positions. The difficulty for the UAE, is because nothing to do with the UAE by the way we are part of the global marketplace, foreign moneys that came into this market were withdrawn.”

Over five months later, liquidity in the UAE still remains an issue. While the UAE Central Bank Governor Sultan bin Nasser Al Suwaid said on Friday that “the UAE banking sector has high levels of liquidity compared to a few months ago,” that “banks are back to extending personal and small loans,” and that the availability of cash and credit was “much better now than it was around four months ago,” Tomalin disagreed:

“There is no doubt that there isn’t enough liquidity in the system,” Tomalin. “There has to be either some quantitative easing by the Central Bank broadly speaking–by buying in securities from banks and giving them money–or some easing in the ratios. Because banks are tight for liquidity, there is quite a bidding war for deposits, and this is keeping interest rates higher than they should be.”

Interest rates have indeed remained high–the one-month Emirates interbank offered rate, which banks charge for loans, is 1.98750% compared with LIBOR’s 0.2756%. Earlier this week, the Central Bank noted it would like to create an “official” interbank rate in order to boost lending.

Interesting interview with Cecilia Ibru, CEO of Nigeria’s Oceanic Bank International, in the latest McKinsey Quarterly (free subscription). Among other salient points:

“Nigeria has not yet developed into an industrial economy, because we still depend on imports. But it’s not as if we can’t produce things in Nigeria. The downturn might be just the opportunity for us to work a little bit harder and not be so dependent on oil and gas. We need to do everything in our power to produce more and to promote the growth of businesses outside the oil sector. If we can get that right, the economy will boom, because the average man on the street wants to have his own business—he just doesn’t have the enabling infrastructure to support it,” says Ibru.

Oceanic has risen since 1990 from a small, family owned operation to a publicly listed firm that is now one of Nigeria’s top five banks by assets. Eyeing the future, Ibru only sees further growth. “In five to ten years, we expect to be a well-known, established bank beyond this subregion of Africa—Nigeria first, the west coast of Africa next, and then central Africa,” she projects. But the firm made headlines for the wrong reasons last week, however, when it announced a 29% fall in net profit for its first half-year to the end of June, based primarily on a combination of loan losses, interest rate contraction and operating cost rises, speculated one analyst.

Back in June, The Banker, a London-based publication of Financial Times, included Nigeria’s Union Bank in its “Top 1000 world banks 2009” list as one of 13 Nigerian Banks in the sub-Saharan Africa that showed “solidity, resilience and growth during the period under review.” Moreover, it wrote, “Nigerian banks continued to amass Tier 1 capital in calendar year 2008, making them even stronger than last year, when compared with the traditionally dominant South African banks”. This past week, Fitch Global Rating again awarded the Bank a B+ Issuer Default Rating (“IDR”) which measures the “perceived level of support that the Bank would receive from the sovereign by virtue of its well established domestic franchise.” Per the report, Union Bank, one of Nigeria’s largest by total assets, has grown its “relatively diversified” deposit base by 58% FY08, and also holds “acceptable” liquidity levels. Concurrent with its sound retail franchise, the Bank’s market risk is thus “moderate,” Fitch concluded.


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