All the banks that failed the Central Bank of Nigeria (CBN) stress test last year would need to raise N1.5 trillion ($10 billion) to meet up with the apex bank's 10 percent Capital Adequacy Ratio (CAR) requirement, according to analysts at the Renaissance Capital (Rencap).
Besides, with capital shortfall of N2.1 trillion ($14 billion) and negative equity of N1.2 trillion ($8 billion), the analysts said in their report released yesterday that the banks would need to source another N600 billion in fresh capital to pay the N620 billion emergency liquidity support from CBN.
However, the House of Representatives on Wednesday passed the Asset Management Corporation (AMC) bill with capital base requirement of N10.05 billion ($67 million) for the purpose of taking care of the non-performing loan assets of the banks, which ultimately will free the books of the banks for onward lending to the real sector.
CAR is the ratio of a bank's capital to its risks which is a measure of the amount of its core capital expressed as a percentage of assets weighted credit exposures. This determines the capacity of the bank in terms of meeting the time liabilities and others such as credit risk, operational risk, etc. In other words, it serves as a "cushion" for potential losses, which protects the bank's depositors or other lenders.
The banks that fell short of CBN's capital, liquidity and corporate governance tests last year were Afribank, Finbank, Intercontinental Bank, Oceanic Bank and Union Bank. Others are Bank PHB, Spring Bank, Equitorial Trust Bank, Wema Bank and Unity Bank. The chief executives and executive directors of the banks apart from Wema and Unity have since been sacked and replaced with CBN appointed chiefs.
The report singled out Oceanic and Union banks for sell ratings based on sufficient levels of disclosures and on the analysts' hunt for values among the embattled banks, particularly with the imminent establishment of the Asset Management Corporation (AMC).
"Hunting for value in the distressed banks, regardless of whether one agrees or disagrees with the quotation of the distressed banks, the fact is that they are publicly traded. On this basis and in view of the pending passage of the AMC bill by the Senate, we decided to hunt for value among this herd of white elephants. However, because of generally poor disclosures by these banks, we focused on the only two banks that have disclosed sufficient information to form a basis for valuation: Oceanic Bank (Oceanic) and Union Bank of Nigeria (UBN).
"Fair values suggest further downside potential. Based on our three-pronged approach to valuing these distressed banks, our fair estimates of Oceanic and UBN, respectively, are N1.59/share (28 percent below Oceanic's current price) and N4.34/share (30 percent below UBN's current price.) On this basis, we reinitiate coverage of both banks with sell ratings. In our view, the market is not pricing in the cost of recapitalizing these banks," the analysts said. However, current share price showed 6.15/share and N2.10/share for Union and Oceanic banks respectively.
The report also favoured First Bank and UBA as two natural consolidators, while stressing the relevance of healthy banks in the resolution of the distress saga. According to the report, "although the passage of the AMC bill by the Senate will enable the acquisition of distressed banks, we continue to see more value in holding the equity of the acquiring (healthy) banks. Nigeria is a buyer's market as CBN needs the healthy banks to consolidate these distressed entities more than the healthy banks need these assets, in our opinion. We strongly favour First Bank and UBA, which we regard as the two natural consolidators of systematically important but distressed banks."
The analysts were optimistic of potential excess liquidity occasioned by activities of the healthy banks and injections from foreign investors through acquisitions. "Additionally, there is a further $7 billion of excess capital in the healthy banks (i.e 14 banks that passed the CBN/NDIC audit). Also, we expect the healthy banks to raise $3 billion of equity capital for restructuring the distressed banks, and anticipate that international banks will inject a further $2 billion into the Nigerian banking system through acquisitions. This all brings the total capital potentially available to the distressed banks to $19 billion."
Distressed banks need N1.5trn to meet CBN's capital requirement – Renaissance Capital (http://www.businessdayonline.com/index.php?option=com_content&view=article&id=9586:distressed-banks-need-n15trn-to-meet-cbns-capital-requirement--renaissance-capital&catid=1:latest-news&Itemid=18)
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