Macroeconomic pressures likely to herald corporate mergers, acquisitions – Analysts

The coronavirus pandemic will speed up merger and acquisition in the various sectors of the economy, especially in the financial services.

Analysts surveyed by MarketForces explained that there is an intrinsic cost to moratorium that deposit money banks are giving their customers.

Apart from that, it is not certain that the economy will heal in 12-months. So, the sector is exposed to increased rate of default.

“Dishing loans into the economy would come at risk, until government, companies and household finances improve”, analysts stated.

MarketForces research gathered that balance sheet weakness triggered by the ravaging virus will force another round of merger and acquisition in Nigeria, analysts have stated.

Worried about weak assets quality in the banking sector, Agusto and co estimated that non-performing loan in the banking sector to rise to 13%.

The credit and rating agency said heighten exposure to vulnerable industries threaten Banks risk asset, thus expect operators to recapitalise in the short term.

As the Central Bank of Nigeria adopted N360 to a dollar as official foreign exchange rate, this has reduced banks capital in dollar term.

With reported strong exposure in the energy, oil and gas as well as manufacturing, commerce and retail, a number of banks’ are expected to raise Tier-II capital to survive going forward.

Also, census analysts are adjusting estimates downward to reflect current economic situation that have impacted government, companies and individual at various degrees.

MarketForces gathered that a there is capital strained among smaller banks due to the Central Bank of Nigeria’s loan to deposit ratio.

This position has been exacerbated following the devaluation of naira or what the apex bank adjustment made to FX in the recent time.

Most of the corporate marriages would take place in the financial services sector, LSintelligence Associates said in an email.

Some investment bankers who spoke with MarketForces Research analysts added that it is very likely that merger and acquisition will kick off in the banking sector.

MarketForces Research gathered that both insurance companies and microfinance banks are already walking a tight rope.

LSintelligence Associates stated in an email that there is an indication that banks would have a rough ride in 2020.

The firm explained that it would take nothing less than 18 months for global economy to heal. Research analysts at the firm however stated that it may take Nigeria more time to recover.

Pundits’ views remain that banks do better when there is an improved productive activities in the economy.

“The era of outperforming the economy has ended for deposit money banks”, LSintelligence stated in an email.

The firm explained that banks are face with multiple risk factors which include capital position, high exposure to oil and gas clients and lower yield on securities investment.

According to the firm, it stated that Tier-1 Banks exposure to oil and gas clients would reduce their earning capabilities down the year.

It also added that the big balance sheet lender’s would book higher impairment on credit losses as a higher proportion of loans would inched up to higher stages.

Analysts said that Tier-2 banks would seek more capital due to a number of issues which include weak capital position, adjustment to foreign exchange.

MarketForces had reported that the apex bank technically devalued the naira in the first quarter as it raise FX rate to bank to N380 at Importer and Exporters Window.

While the apex bank denied there was devaluation, the CBN said it was just an adjustment but this is yet to be reversed.

Many currency traders note again revealed that there is higher probability for Naira devaluation.

In the foreign exchange market, Naira traded above N440 on Friday at the parallel market as demand continues to outpace supply.

In reacting to scarce FX, many banks have reduced naira spending per customers by more than 66%.

Analysts stated that a case in point is GTBank that have reduced its Mastercard naira debit card spending from $1,500 to $500 at the moment.

Other small and medium size banks have also been unable to meet demand, though the CBN said it has resume FX sales for legitimate use.

In their separate earnings call with analysts, some banks stated that they have stressed test their book should there be devaluation.

Lenders’ internal stress test was carried out to see the impacts that potential devaluation would have on capital adequacy ratios.

Due to declining global prices of oil, lenders said they also carried out stress tests to gauge how much cover they got on weak oil performance.

MarketForces research analysts explained that an increase number of operators in the banking sector would raise Tier-II capital after the dust settles.

Macroeconomic pressures likely to herald corporate mergers, acquisitions – Analysts


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