RenCap Predicts M&A among Nigeria’s Mid-tier Banks

RenCap Predicts M&A among Nigeria’s  Mid-tier Banks

•Reveals tech companies raised $1.4bn

•Moody: Nigeria’s external reserves to remain strong

Nume Ekeghe and Kayode Tokede

Analysts at Renaissance Capital Limited (RenCap), an international research and financial advisory company have predicted that with the upcoming Basel III policy that requires enhanced capital buffers, some of Nigeria’s tier-2 and tier-3 banks might opt for mergers and acquisitions (M&A) in order to strengthen their capital positions.

The firm also forecasted in order to enhance economic recovery in the country and effectively manage inflation, the Monetary policy committee (MPC) might hike its rate by one percentage point next year.

The Acting Chief Executive Officer, Renaissance Capital, Mr. Samuel Sule and the company’s Director, Frontier/ Sub-Saharan Africa Banks and Fintech, Mr. Adesoji Solanke made the predictions yesterday, during a virtual media briefing where they discussed, ‘Wrapping up 2021 and looking out for opportunities in 2022 for Nigeria and its fintech sector.’

Speaking on the outlook of the banking sector, Solanke said what would drive ratings for Nigerian banking equities would be the central bank’s policy decisions, particularly with respect to the exchange rate and capital controls.

Solanke said: “Nigeria remains a significant underweight in the equity portfolio majority of international clients and only those who have capital stock in the country have been participating in the equity markets.

“We have not seen any meaningful capital being allocated to Nigeria, given the central bank’s capital controls and exchange rate policy over the last one to two years.

“Also, the naira at the investors and exporters (I&E) window is 13 per cent overvalued, the fair value for the naira of N473 per dollar. The I&E window rates at N482 per dollar by end of 2022 and also, higher transport costs below average harvest and high cost of imported food could all combine to put upside upward pressure on inflation by the next year.”

Speaking on anticipated M&A, Solanke said: “There’s room for M&A and we think it would be between tier-two and tier-three banks, because now they’re even much smaller in the grand scheme of things.”

On his part, Sule said: “Continued growth in digitalisation trends across our markets, with the pandemic having meaningfully fast-tracked digital adoption.

“As the continent continues to attract more funding, we are excited about what the entrepreneurs will build on the infrastructure layers that are getting built in payments and open banking.

“We expect this to drive embedded finance which will be a major driver in how fintech companies drive digital solutions as they scale, making almost any tech company a fintech.”

Furthermore, Solanke disclosed that Nigeria’s start-ups and tech companies in 2021, raised a total of $4billion in over 750 deals.

He maintained that Fintech remained the most funded, accounting for well over 50 per cent of the year-to-date (YtD) funds raised, adding that Nigeria remains the most attractive market.

He highlighted that OPay in 2021 raised $400million Series C, while Wave and Andela’s $200million Series A and E respectively, Flutterwave raised $170million Series C, amongst other companies.

Meanwhile, Moody’s, a global rating agency has predicted that Nigeria’s external reserves would remain strong in 2022, with the expectation that it would be bolstered with the commencement of Dangote Refinery and other fiscal and monetary policies being put in place by the federal government(FG).

Vice President/ Senior Credit Officer, Sovereign Risk Group Moody, Mr. Aurelien Mali said this yesterday, during a webinar with the theme: “Nigeria: Challenges and Opportunities Arising from the Pandemic.”

Also at the webinar, Group Chief Financial Officer, Ecobank Transnational Incorporated, Mr. Ayo Adepoju urged the Central Bank of Nigeria (CBN) to review the current Cash Reserve Ratio (CRR) which is pegged at 27.5 per cent.

Speaking on Nigeria’s external reserves, Mali said: “ We expect the reserve to remain strong. We have a view that growth is going to average 3.5 per cent until 2025, supported also by some key project like the Dangote Refinery.

“So, the research of the reserves have changed, it was extremely volatile over the last decade and the lowest point was in 2016 when you had the very active militancy in the Niger Delta after the production of oil was stopped.

“But let’s say that in 2018 to 2019, most of the big chunk of the increase in the reserves were foreign portfolio and inflows that were very volatile by nature. And so there was a risk that reserve could fall very quickly.”

“Today it is different because the rebound of the oil price that has been supportive and the IMF gave $3.4 billion in March 2020. The Special Drawing Rights (SDR) location of $3.4 billion recently, and the country has been able to access the international market issuing $4 billion recently, you had also the World Bank, the African Development Bank, and therefore the reserves never went down like between 2015-2016 and it even rebounded.

“And there is the Petroleum Industrial Act (PIA) which is an important piece of legislation, which which should increase the investment in the oil sector in the future,” he added.

On what prompted its upgrade of Nigeria’s rating, he said economic reforms and policies of the federal government had positively affected Nigeria’s rating.

On his part, Adepoju who spoke on the challenges the banking sector was facing, advised that that CRR policy should be reviewed downward.

Adepoju said: “The cash reserve requirement policy of the central bank is very massive, in terms of the impact on the liquidity in the local market.

“In terms of the biggest elephant in the room, which is in terms of the cash reserve requirements, the policy is about 27.5 per cent but the proxies of what we’ve seen in the market is that the industry average is well over 40 per cent.

“So, you see more of the liquidity sitting with the central bank, earning zero per cent. And when you have an industry average of cash reserve requirements over 40 per cent, that is the highest in any part of the globe as most of the markets have cash reserve either at five per cent or 10 per cent, 12 per cent or 13 per cent. “Never would you see cash reserve going to 40 per cent threshold. I understand the perspective of the central bank trying to manage excess liquidity in the market, but at the same time, it is important to ensure that the banking industry has sufficient liquidity to power through growth in the market.

“For us overall, forex is not a major issue, because it’s far better than where we were two years ago. So, the forex position in the industry has improved, but, of course, there’s still, you know, much room, for expansion, but as long as the players continue to have access to global markets, you know, that should not be a big source of concern.”

Related Articles