M&A: Investment Firm Places Unity, Heritage, Keystone Bank on Watch List
With the expectation of possible merger and acquisition in the banking sector in 2020, a proprietary investment company, PAC Holdings has placed Unity, Heritage, and Keystone Bank on the watch list.
In 2019, the Central Bank of Nigeria Governor, Godwin Emefiele, announced there will be a need to raise the capital base of banks to reflect the reality of the current exchange rate.
Analysts recalled that in 2014 when CBN moved its capital base from N2 billion to N25 billion, a dollar to naira was N100. Increased regulation and thinned funding would pressure lenders in the year, making the growth trajectory unattractive for investors.
Earlier, the CBN hinted that banks would be going for another round of recapitalisation. In dollar terms, Nigerian banks’ N25 billion minimum capital requirement has dropped more than 65%.
As an example, Unity Bank Plc’s total equity has been negative. Despite the fact that the bank sold off its non-performing assets, its performance rating has not improved.
At the end of the third quarter of 2019, shareholders’ funds have been depleted to N242.567 billion negative.
Base on its numbers, analysts held that Unity Bank Plc may struggle to meet the 65% LDR target as total deposits due to customers at the end of 9-months of 2019 result was N254.064 billion.
At the time, the bank reported net loans to customers of about N88.79 billion. Keystone Bank is poised to return to profitability across all business units and achieve sustainable growth, according to information on its website.
As a private company, the bank is not required to publish its financial report. But experts estimate that the bank’s total assets hovering around N400bn.
For Heritage Bank, competition has not been really friendly as big banks scramble to grow deposits and loans at the same time.
Tier 1 banks account for about 70% of the banking sector market share, and 80% of the share of business among the banks listed on the stock exchange.
It would be recalled that at the recapitalisation period, Naira’s exchange for the dollar was about N132. Today, the official swap position has widened with the naira-dollar exchange rate at N306.
Analysts held that with the increasing regulation, some small and medium sizes banks’ earnings are expected to be pressured in 2020.
The CBN in recent times raised its regulatory policy stance, cutting earnings sources of deposit money banks using various directives. The Monetary Policy Committee of the CBN recently increased the cash reserve ratio to 27.5%.
This, in addition to the industry benchmark of loan to deposit ratio of 65% thinned down banks’ funding capacity to 7.5% of total deposits collected.
PAC Capital expects to see a slowdown in banks’ non-interest income; though analysts think interest income would rise amid surge in non-performing loans.
At the current position, smaller banks would likely struggle to survive, analysts told MarketForces.
The increasing regulation risk support no growth trajectory estimates on banks by some foreign investment bankers.
Tellimer as an example see the Nigerian banking sector growth for 2020, just as EFG Hermes watch the sector with caution.
The CBN in order to stimulate growth and channel fund into the real sector increased LDR.
In the second half of 2019, the apex bank raised DMBs loan as a proportion of deposits to 60% with September 30 as the target date.
The move was informed by the bearish stance of lenders to provide credit support for the real sector of the economy. Banks became bearish at the point when the industry non-performance loan was about 15%.
The high rate of default, coupled with the economic recession that swept the country was seen as a trigger point. Analysts think it would be foolish for banks to lend when the average yield on fixed instruments was about 16%.
The CBN stated in the directive that the penalty for non-compliance would be an increase in Cash Reserve Ratio. At the time, CRR was 22.5% with the Nigerian apex bank liquidity ratio benchmark of 30%.
Many banks, including some Tier 1 capital were unable to meet the CBN target, and about N500 billion were sterilized.
Despite this, the CBN raised the loan to deposit ratio to 65% with December 2019 as the review period. For the first quarter of 2020, the apex bank maintained the status quo on the LDR level.
Again, analysts’ consensus estimates for LDR in 2020 is 70%. This in addition to 27.5% CRR would have heavier earnings-dilutive effects on banks.
M&A: Investment firm places Unity, Heritage, Keystone Bank on watch list
