Fitch backs return of Nigerian banks to Eurobond market

Fitch backs return of Nigerian banks to Eurobond market

Fitch Ratings said the return of Nigerian banks to the Eurobond markets marks a small step towards reducing maturity mismatches between foreign-currency (FC) assets and liabilities, Fitch Ratings says.

This is credit positive as it lessens FC liquidity risk, but the impact will be modest as the new bond issuances are small relative to total term FC lending.

Renewed interest from international investors seeking yield has enabled several banks to issue Eurobonds since late 2016, for the first time since 2014, albeit at higher yields following rating downgrades in the intervening period. In most cases, the issuance will boost FC funding rather than simply refinance maturing FC debt.

Nigerian banks have traditionally operated with significant maturity gaps, funding longer-term loans with short-term customer deposits, as is the case in many emerging markets. For FC liquidity, there are no prudential limits in place. The Central Bank of Nigeria’s regulatory liquidity ratio (requiring banks to hold liquid assets equivalent to 30% of total deposits) is focused exclusively on naira liquidity. There are regulatory limits to control open FC positions in banking and trading books, but these target the management of market risk and its potential impact on banks’ capital rather than liquidity risk.

The term of bank lending has gradually lengthened since 2012 when Nigeria opened up opportunities for investment in the oil sector. We estimate that about half of all bank loans are medium-term with maturities of three to four years. These are largely in FC.

This is a high share for a low-rated market where banks have limited access to longer-term FC funding. FC term loans underwent considerable restructuring last year and this year, particularly among oil-related borrowers facing cash flow constraints given weak oil prices and disruptions in production. The devaluation of the naira in mid-2016 also caused debt servicing problems as borrowers reliant on naira revenue streams struggled to find additional funds to repay rising FC obligations. Loan restructuring typically involves a two- to three-year maturity extension, pushing out final maturities to 2019 and beyond.

Sources of longer-term FC funding are limited for Nigerian banks and we estimate that FC funding equates to less than half of FC sector loans.

Nigerian banks are infrequent issuers on the international capital markets, but three leading banks with deposit market shares near or above 10% have issued medium-term Eurobonds since 4Q16 (Zenith Bank: USD500 million; United Bank For Africa: USD500 million; Access Bank: USD300 million). This week, Fidelity Bank, a smaller bank with a 5% deposit share, issued USD400 million. We think more banks may follow. Outstanding FC bonds issued by banks totalled USD4 billion at end-June 2017, the bulk of which is in Eurobonds.