Nigeria: Local Banks Reconsider Offshore Subsidiaries

As the reality of the CBN's directive on funding of offshore subsidiaries dawns on Nigerian banks, industry affairs commentators said although the measure has dealt a blow to the dream of making Nigeria a banking hub for the African continent, it is nevertheless capable of halting a regime of reckless competition for more sphere of influence outside the Nigerian shores, reports Festus Akanbi

As Nigerian banks grapple with the reality of the ban placed on the funding of their offshore subsidiaries through funds generated locally, banking industry watchers said the Central Bank of Nigeria (CBN) may have succeeded in putting paid to the era of unbridled apetite for foreign subsidiaries among Nigerian banks.

According to the regulatory authorities, banks must obtain new funds to recapitalise their foreign units and won't be allowed to use money already raised by their parent companies. Nigerian banks that can't raise additional capital for foreign subsidiaries in the host market will have to close the units, the banking sector regulator said on July 26.

Host Countries Raise the Ante

Industry watchers said the CBN's tough position was triggered by the latest hike in capital base for foreign banks in Zambia, a trend which is fast becoming popular among African countries where Nigerian banks have presence.

Another African country, Zimbabwe is giving banks until the end of September to increase their minimum capital to $100 million from $10 million for investment banks and $12.5 million for commercial lenders. Zambia's decision in January that foreign lenders must have a capital base of $100 million affects UBA and Access Bank Plc, two Nigerian banks which operate units in Zambia. Kenya, Ghana and Gambia have also increased minimum capital requirements for foreign lenders in the past 12 months. At least seven of Nigeria's banks, six of them in the Bloomberg NSE Banking Index of 10 most-capitalised stocks, operate units across Africa. Guaranty Trust Bank owns units in Gambia, Sierra Leone, Ghana, Liberia, Ivory Coast and the UK. UBA has 15 of its 19 foreign subsidiaries in Africa.

Zambia became the latest African country to hike capital requirements for foreign banks to $100 million from $2 million this year, after Ghana and Kenya, as it tries to insulate its banking sector from the effects of a weak global economy.

However, CBN said banks are already complying with the directive that bars them from using locally generated resources to fund their offshore subsidiaries.

Speaking at a conference on cashless banking organised by the banking watchdog and Phillips Consulting in Lagos recently, CBN Deputy Governor, Banking Operations, Tunde Lemo, said the banks were keeping to the new rules which banned them from guaranteeing the deposit of their foreign subsidiaries.

\The policy also stops the lenders from recapitalising their offshore subsidiaries with funds from parent companies.

Although the CBN is yet to make public what most of the affected banks have settled for, some of the banks, at individual levels, have begun to set targets for themselves as far as their plans for their offshore subsidiaries are concerned.

For instance, UBA expects its African subsidiaries to contribute 25 percent of its profit this year, Chief Executive Officer Phillips Oduoza was quoted by Bloomberg as saying on July 18. Countries where UBA has representations include Cameroon, Sierra leone, Zambia, Guinea, Tchad, Cote d' Ivoire and Ghana. Others are Tanzania, Burkina faso Mozambique, Kenya, Senegal, Uganda and Gabon.

Responding to THISDAY enquiries last week, Director, Investor Relations, United Bank for Africa Plc, Mr. Kayode Fadahunsi said the bank's African subsidiaries are well rooted to meet all the challenges in the host countries. He said "Our African subsidiaries are capitalised well enough to do business and meet regulatory provisions. About 15 of the 18 African subsidiaries are now profitable, thereby making it easier for them to finance themselves going forward," adding "Our strategy is to make our Zambian subsidiary a local bank." Meanwhile, no response could be got from Access Bank on questions raised on the funding of the bank's offshore subsidiaries as at the time of going to press.

New Ownership Structure

An indication that the influence of Nigerian banks on their offshore subsidiaries may drop was given by their decision to release a sizeable chunk of shares of the offshore banks to local investors in the host countries. UBA, was for instance, said to have recently disclosed it would turn its Zambian unit into a local bank and consider a public issue of shares to meet new capital rules in the country.

Investor Relations Director of the bank, Kayode Fadahunsi, reportedly said: "We are already evaluating a number of possible options that will see UBA Zambia become a local bank in that country," adding that UBA would require participation from Zambian investors.

Banking analyst with Renaissance Capital, Adesoji Solanke, said, "It poses a clear risk to future external growth prospects for Nigerian banks offshore," adding that Access Bank was working on selling some of its offshore units.

Interpreting the CBN's policy, analysts said the measures meant that Nigerian banks may have to forgo their ambitions of establishing the country as a pan-African banking hub on the continent, or look for capital elsewhere but not at home.

Consequently, the affected banks including GTBank, UBA, First Bank, Access, among others may retreat from opening units across Africa after the directive that stops them from funding foreign subsidiaries, analysts at FBN Capital and Standard Bank Plc said.

"If all else fails, then UBA or whoever it is will have to give up the African expansion dream in that specific country," said Bunmi Asaolu, head of research at FBN Capital.

Sources said prior to the apex bank's tough stance, some of the banks had mapped out plans to further extend their tentacles to more African countries. According to Solanke, the new rules could also affect First Bank and Guaranty Trust Bank given their ambition to expand offshore.

UBA's Fadahunsi said the bank already had the required $20 million necessary to become a local bank and that it had submitted a proposal to Zambia's central bank on how it intended to recapitalise the unit before a December deadline. However, one analyst said the bank may have to sell up to 50 percent of its shares in UBA Zambia to become a local bank.

Banks are More Cautious

However, watchers of the emerging scenario said the trend isn't bad for the Nigerian banking industry. As argued by emerging markets strategist with Standard Bank in London, Samir Gadio, "Nigerian banks with expansion ambitions will have to appropriately assess the viability of the markets before opening branches."

He added: "Banks with a number of subsidiaries in sub- Saharan Africa will need to evaluate those businesses and their market outlook considering that the subsidiaries will have to raise capital in the host country or offshore," he said.

Implications

Another foreign analyst that endorsed the new regime in banking supervision in Nigeria is a director of Fitch Ratings, Denzil De Bie, who said "From a funding perspective and a risk perspective, we would see that as a much better and prudent approach to going into a country." He explained that the measure remove the temptation to grow for the sole purpose of expansion.

Former President, Finance Houses Association of Nigeria, Mr. Eddie Osarenkhoe, said the initiative was a welcome development that would make credit facilities available in the Nigerian economy. Osarenkhoe said it was regrettable that banks mobilised money from the public and divert it to run subsidiaries at the expense of giving loans to customers. He explained that the funding of bank subsidiaries with public fund has made the financial sector incapable of discharging its financial obligations to the customers. Osarenkhoe said that many banks had been hiding under the universal banking system to siphon money for personal use and negatively affected the industry. He said that corruption in the banking sector led to the financial crises in the banks.

"The CBN's ability to implement and enforce the directive will bring sanity and reduce capital flight out of the country," he said.

Speaking in the same vein, former President, Association of National Accountants of Nigeria, Dr Samuel Nzekwe, said the move by CBN would curb money laundering.

"The collapse of the capital market was due to actions of the bank executives to divert money and buy shares in the same bank to finance their subsidiaries," Nzekwe said. He said many bank managers borrowed money from the banks and used them to buy stocks of their subsidiaries and converted them to personal use. Nzekwe said many banks in the country failed to become mega banks because of the lack of capacity to give long term loans to customers and failure to finance their foreign subsidiaries effectively.

CBN's Directives

The CBN noted that the requirement to increase funding for foreign units has "exerted enormous pressure on the capital base of most parent banks," prompting the measures taken. It wants banks to consider alternatives including mergers and acquisitions or sourcing of funds through capital markets and private placements for their foreign units.

"Under no circumstance are parent banks allowed to guarantee the deposits of their foreign subsidiaries," the central bank said in a statement on July 26.

The apex bank had noted with concern the incessant demands on Nigerian banks by various host regulators for the recapitalisation of their foreign subsidiaries.

These demands, it said, have brought enormous pressure on the capital base of most parent banks due to the lull in the capital market, making it difficult to raise capital, diminishing profit margins and increasing competition.

The apex bank said these capital demands were not in tandem with the level of growth in business activities in these lenders, saying it would not allow banks to continue funding their subsidiaries from parent companies, but would encourage them to consider mergers and acquisitions with other local or foreign banks in the host country.

"The CBN shall not permit any further capital outlay from parent banks to augment the capital needs of foreign subsidiaries but would rather encourage banks to consider mergers and acquisition arrangements with other local and or foreign banks in the host country. Under no circumstances are parent banks allowed to guarantee the deposit of their foreign subsidiaries," it said. Also, the apex bank said the banks could source for fresh capital from the host country capital market either through private placements or public offers.

It also recommended that parent banks whose foreign subsidiaries are unable to raise additional capital in the host country market will be required to submit exit strategies from those jurisdictions not later than June 30, 2012.

Additionally, Nigerian banks with foreign subsidiaries are required to submit within 60 days from May 18, 2012 recapitalisation plans in anticipation of regulatory capital increases under Basel II and III and any other unforeseen increases by host countries.

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