Inflation, Naira Devaluation Erode Banks’ Capital – Operators

Inflation, Naira Devaluation Erode Banks’ Capital – Operators

Nigeria’s rising inflation and the recent harmonisation of the foreign exchange rates have been identified as factors that have eroded the capital base of banks in the country.

This was disclosed in different interviews with media, as two financial institutions also announced that they would be raising additional capital in coming weeks after getting the approval of their shareholders.

Fidelity Bank had stated on Friday that it would seek the approval of its shareholders to raise additional capital via the issuance of 13,200 billion ordinary shares via public offer and rights issue.

It said, “That the issued share capital of the company, currently N16bn made up of 32 billion ordinary shares of N0.50 each, be increased up to N22.6bn by the creation of up to 13,200 billion additional ordinary shares of N0.50 each.”

On Monday, FBN Holdings indicated that it planned to raise fresh capital by way of a rights issue. The lender would raise funds via the creation of 8.974 billion ordinary shares at 50 kobo each.

Reacting to the development, financial analyst, Okechukwu Unegbu, blamed it on Nigeria’s inflation rate, which currently stands at 22.79 per cent, as well as the floating of the naira.

He said the current situation of Nigerian banks was due to these two major factors, describing the state of banks as endangered.

He said, “You have to look at the inflation rate which has eroded the capital base and net worth of the banks. All our banks are endangered. That is why I blame the Central Bank of Nigeria for closing over 100 microfinance banks. They ought to have used some measures to help them because they serve a major segment of the economy.

“Then look at the dollar-naira exchange rate. That has also eroded the capital base of the banks. This calls for caution. If the banks don’t raise their capital base, chances are that they will be in serious liquidity problems. It is rather worrisome because the banks are performing very well.”

A similar stance was echoed by the Managing Director of APT Securities and Fund Limited, Kurfi Garba, who predicted that more banks would seek fresh capital injection.

He said, “If you look at the banks who have indicated interest in raising funds, they are being proactive. From the devaluation of the naira and harmonisation of the forex rates, we are talking about N800 per dollar. When you divide our shareholder capitalisation and convert it into dollars, you see that it is small.

“And if you are in the global industry, there is a minimum threshold that CBN expect everyone to have. They have to be proactive, to not wait until the new guidelines come before they source for money. Using the example of the African Finance Corporation, which closed its Rights Issue in March, Kurfi pointed out that its capitalisation was in dollars, with a minimum capitalisation of $1bn, which when converted to naira, was about N800bn. He said local banks needed to boost their capital base.

“It is just a matter of time before CBN comes with their guidelines. The devaluation of the naira made the banks’ capitalisation look small. If we want to play on the global stage, then we have to be up to the task. I remember that Zenith Bank and GTB sought their money before CBN announced N20bn capitalisation, so by the time it was announced, they didn’t merge with any bank, they didn’t come to the market because they were proactive. They had their funds at hand. Two banks are currently doing Rights Issues and more will come,” he stated.

Meanwhile, Unegbu also raised questions about the purchasing powers of investors which had also been impacted by inflation.

He said, “The question is, will there be the confidence in the populace to buy the shares? The purchasing power in the economy is very low. People might prefer to preserve what they have now rather than going to make investments. Once the saving culture is low, it will impact investment.”

For Kurfi, the capital raise is good news for investors but they will only buy if the price is right.

“In this case, if your price is right, they will buy, if it is not, they will ignore you. Everyone should come with the right price. For me, the more companies that come to the market, the better it is for investors,” Kurfi added.

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