CBN offshore policy unsettles banks

The Central Bank of Nigeria’s (CBN) May 18 directive stopping deployment of capital from parent banks to strength or recapitalise their foreign subsidiaries has put banks under pressure to meet up with requirements from the host countries, BusinessDay investigations have revealed.

The CBN, in anticipation of regulatory capital increases under Basel two and three, has barred local banks from guaranteeing the deposits of their foreign subsidiaries. Additionally, the regulator is requiring banks with foreign subsidiaries to submit, latest by July 14, 2012, plans to ensure that their subsidiaries are fully capitalised, so as to be internationally competitive.

Consequently, the CBN has through the circular, given the banks three options: raise fresh capital from the offshore capital markets via private placements, or public offerings; pursue a merger or acquisition, and should the external capital raisings fail, submit a strategy for exiting the relevant foreign jurisdictions, not later than 30 June, 2012.

Samir Gadio, Emerging Market Strategist at the Standard Bank, London , advised banks with expansion ambition and those currently having offshore subsidiaries to be cautious, adding, “The CBN’s circular probably factors in these risks, but also seeks to ensure that Nigerian banks have adequate buffer to absorb any systemic or economic shocks. Additionally, Nigerian banks with expansion ambitions will have to appropriately assess the viability of the markets before opening branches. Banks with a number of subsidiaries in sub-Sahara Africa will have to evaluate those businesses and their market outlook, considering that they will need to raise offshore capital to support the individual subsidiaries, should the need arise, as in the case of Zambia.”

Razia Khan noted that action was necessary to tap from the gains of consolidation.

“Now, one potential source of risk to Nigerian banks, and perhaps ultimately Nigerian tax payers, would perhaps be risky activities undertaken by Nigerian banks operating abroad. The CBN cannot regulate the financial sectors of other jurisdictions, so instead, it has to put in place the best safeguards available to it. This involves raising the capital adequacy ratio for all banks granted international banking licences, as these banks typically might undertake more risky activities in foreign jurisdictions that the CBN would not be in a position to regulate”, Khan said.

The CBN action may be based on recent raising of minimum capital requirements by some African central banks, for banks operating within their jurisdictions. For instance, banks with subsidiaries in Zambia are contending with recent upward review in minimum capital requirement from $2 million to $100 million (and to $20 million for local banks), with a December 31, 2012 deadline for full compliance.

Further investigations revealed that UBA and Access Bank will be the most affected by the directive, as both banks have the highest number of offshore operations within the industry, with 18 and nine respectively, in offshore countries. While the two are thinking of asking for an extension of the deadline, one of them is believed to be working on the disposal of one or more offshore subsidiaries.

Renaissance Capital further said, “According to management of both banks, they face the most near term pressure in their Zambian operations, where the minimum capital requirement for foreign banks has been raised from $2 million to $100 million (and to $20 million for local banks), with a December 31, 2012 deadline for full compliance.”

The CBN is concerned that given the lull in capital markets globally, including in Nigeria , these increased capital requirements have exerted pressure on the capital bases of Nigerian banks, ultimately weighing on their profitability and competitiveness.

The analysts however observed that there was less clarity about the deployment of capital for future/new subsidiaries by some banks that are thinking of further expansion, adding, “On this front, we highlight First Bank and GTBank as banks that could be affected, given their planned expansions outside Nigeria in the medium term.”

Although they believe that local banks are currently well capitalised, as the action of CBN will strengthen the banks in those countries, they observed that, “On the other hand, it poses a clear risk to future external growth prospects for Nigerian banks offshore. Overall, we think the CBN needs to provide additional clarity about how this directive affects the banks’ offshore expansion plans, which for some banks are core to their medium-term growth strategies.”

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