Declining oil prices and the unwillingness of the government/Central Bank of Nigeria (CBN) to devalue the naira amidst constrained reserves continue to worsen the forex (fx) liquidity position of Nigerian banks. Renaissance Capital highlights the sector’s challenges across four fronts, and believe that, should this trend persist in a weak oil price environment, asset quality and international obligation default risks could be significant.
Customers struggling to source FX for imports
Nigeria is dependent on imports, which Nigerian banks facilitate via the opening of letters of credit (LC). The customer typically repays these after imports are sold; the customer therefore earns naira, then approaches the banks to source FX from the CBN (or goes to the black market), with which the correspondent bank is repaid. With the CBN struggling to provide sufficient FX to meet importers’ FX demands and banks prevented from accepting FX deposits, not only have importers been unable to repay their obligations, they have also struggled to keep afloat – among them import-dependent manufacturers.
Correspondent banks complaining
As importers have struggled to access FX, the Nigerian banks have used their FX liquidity to settle with the correspondent banks (given the LCs are guarantees), in anticipation of the CBN providing liquidity. Feedback from the banks remains that the CBN has been unable to meet FX demand, with estimates of the backlog at $2-5bn and rising. The banks have therefore significantly slowed the issuance of new LCs, further hurting the general commerce and manufacturing sectors. With the CBN maintaining the view that the backlog of FX demand is largely speculative, it has requested that the correspondent banks submit a list of outstanding obligations, although we understand it has been unable to fully meet this FX demand.
Card obligations expose banks to open-ended FX risks
Nigerian banks have continued to reduce their customers’ international payment and ATM limits, with many reducing the limits to $5-15k annually (from $50k), $1k monthly and as low as $100 daily. This has been necessary because customers’ international transactions create open-ended FX exposure for the banks, as they have to source FX to settle with MasterCard/Visa. Given the CBN’s inability to sufficiently meet banks’ FX demand for these settlements and the losses the banks could face if a devaluation occurs while their positions remain unsettled, we think the logical thing to do is to scale down customers’ spending limits, with the risk being that, if FX scarcity persists, the Nigerian banks could shut down international debit card usage, as already announced by Diamond Bank and Standard Chartered (not covered).
Maturing FX obligations at risk
Nigerian banks have c. $3.4bn worth of eurobonds in issue. While we think the banks can still meet coupon repayments, we believe it is becoming increasingly difficult to source FX to service obligations. We estimate that the banks in our coverage universe have at least $1.5bn worth of debt repayments to make in 2016, including $500mn for GTBank, $419mn for Zenith and $202mn for FCMB. Given the macro risks, we understand borrowing costs are now 50-200 bpts higher than three-to-six months ago, which is negative for margins, as we think the banks may be limited in their ability to pass on higher pricing to already stressed customers.