Inter-bank rate rises, investors shun weak firms
By Gbenga Agbana and
Enitar Ugwu
THE uncertainty in the Nigerian banking industry following the recent order that banks should raise their minimum capital base from N2 billion to N25 billion by December 2005, has begun to take a heavy toll on the sector.
From between 23 and 27 per cent, inter-bank rate has shot up to 30 per cent, following the withdrawal of funds from the market by the big banks.
Also, at the stock market, investors have begun to divest from perceived weak banks and invest in perceived strong ones.
The Central Bank (CBN) Governor, Prof. Charles Soludo, on July 6 announced the increase in the capital base, adding that government funds would be withdrawn from the banks as part of the ongoing economic reforms in the country.
The inter-bank rate is the rate at which banks grant loans among themselves. This is different from the Minimum Rediscount Rate (MRR), which is the rate at which the government lends money to banks.
The inter-bank rate and the MRR chiefly determine the lending rate for the public, which the Federal Government has consistently declared it wants to keep low.
The net placers' (big banks) action, The Guardian learnt, is informed by the fact that there is a lot of uncertainty in the system presently and no bank wants its fund trapped.
A look at the inter-bank rates movement since the July 6 announcement by the CBN showed that banks largely have begun to restrict themselves to seven days and 30 days tenured investments.
It also indicates that the rates started on the upward swing immediately after the announcement. For instance, on July 7, the inter-bank rate for 30 days moved between 22 per cent and 25 per cent with seven days tenure rate hovering between 17 per cent and 28 per cent.
However, the following day, there was a percentage drop for 30 days fund as it moved between 20 per cent and 21 per cent while the seven days fund was accessed at 24 per cent and 26 per cent.
Another twist has, however, been added to the deal, as no bank is now able to access even the 30 days fund, leaving only the seven-day fund and the call money.
Even at that, The Guardian learnt, these funds are given to those banks that have the financial muscle to pay back.
On Tuesday, the seven-day money went for between 25 per cent and 26 per cent.
This situation has been worsened by the news that up to 40 banks solely depend on inter-bank market for survival. This prompted a siege by the big banks to the smaller ones to recall their funds.
An industry source informed that this is not unconnected with the "uncertainty of the time" as no bank would want to be caught unawares.
To compound the problems of some of these weaker banks, especially those whose strength lies in mobilising public sector funds, the CBN last week started the withdrawal of such funds from the banks.
The CBN had noted that "the policy action, which represents a tightening of monetary policy stance, is designed to stem the continued high demand pressure on the foreign exchange market, which accelerates the inflation rate."
Apparently not to be caught off guard, the big banks have begun to recall their funds from the inter-bank market.
Also, investors are beginning to dump the shares of some banks quoted on the Nigerian Stock Exchange (NSE).
While dumping the shares of banks perceived to be unable to meet the new capital base requirement, stockbrokers told The Guardian that investors are either opting for the shares of banks perceived to be solid or adopting a wait-and-see attitude, to observe how events will unfold.
Stockbrokers, who spoke with The Guardian on the development, advised banks which cannot meet the requirement to work on merger or acquisition. They also envisage post-merger cash squeeze.
In place of pennystocks in the equities sub-sector, some stocks perceived to be solid are being embraced, while some others are put on offer.
For instance, the shares of six of the 32 quoted banks were on offer last week, while others are on bid. Market operators note that investors are increasingly going for the shares of banks they perceive as having the potentials to meet the N25 billion new capital base requirement.
At last Wednesday's trading, 54.33 million shares of banks were exchanged valued at N293.3 million.
A further analysis of trading on Tuesday this week indicated that the shares of Liberty Bank Plc was the most traded with 22.11 million shares worth N21.45 million, while Chartered Bank Plc followed with 5.83 million shares valued at N14.96 million.
The Director-General of the Nigerian Stock Exchange, Dr. (Mrs.) Ndi Okereke-Onyiuke, had earlier assured that most of the quoted banks would meet the new capital base.
Speaking on the development, the Managing Director of Great Africa Securities, Mr. Wole Abegunde, noted that some investors were beginning to dump the shares of banks perceived to be unable to meet the new requirements.
He advised such weak banks to consider mergers and acquisitions, as suggested by the CBN.
Abegunde said: "Naturally, one will expect that the marginal banks be absorbed or merge. They are already talking, especially for those who are not close. You find a situation whereby two or three banks will merge".
On the effect of the announcement, Abegunde said: "The fear of those who will not meet it is gripping the stock market already. The share prices are already dropping. The prices of big banks are rising in the market.
"The market share of these big banks will increase. First Bank, Union Bank and UBA. The new generation banks will get more funds.
"Mergers have their problems. There could be post-merger squeezing. The most viable option is acquisition".
Another stockbroker and the managing director of Capital Express Securities Limited, Mr. Ariyo Olusekun, shared the views of Abegunde.
Olusekun disclosed that there are uncertainties in the stock market on which of the banks would meet the new capital base requirements.
He also suggested that banks should merge or seek to be acquired, especially by those with common interests while imploring others to seek foreign affiliations if need be.
"You want to borrow money, you want to get cover up to 200 per cent before. We are now going to see banks now coming out with products that will help them to lend effectively to get returns. New products would come. Those in the real sector will have more money to borrow and the economy will grow".
To Mr. Seinde Adenagbe, Head, Capital Market unit of Midas Bank, the development will help to deepen the banking industry, and make available cheap funds to finance the real sector, thus enhancing sustained economic growth.
He said: "It will make the banking industry more viable in terms of depth. It will by expectation allow more development in the real sector because more funds would be available at a cheaper rate".
He continued: "The macro-economy will be better off as our economy will tend to divert from being import dependent. It will make the very few banks that survive it to be stronger and focussed."
On the effects on banks stocks on the NSE, Adenagbe said: "It sent jitters to the investing public by creating artificial fears, which make people to sell some banks' shares. It is believed that it would cause some bank workers to lose their jobs. People are beginning to sell the shares of some banks that are believed not to be able to make it, to buy more vibrant ones. Some executive positions are being threatened."
