Recapitalisation: Governance in focus as competition for scarce funds intensifies

The Central Bank of Nigeria (CBN) requires tier 1 banks to raise their Capital (defined as share capital plus share premium) to N500 billion. The options available to banks are right are a private placement, a public offer to the general public and a right issue for existing shareholders.

The core challenge, sadly, is that this will be happening in an era of high interest rates and patchy confidence in the economy. Currently, no smart investor will want to buy equities/stocks of companies when risk-free rate assets offer a yield of 26-27 per cent, at a time when commercial papers are giving a yield of 25 per cent, inflation rate over 30 per cent while authority allowed the naira slip to as low as N1,800 before making some recovery.

With all the banks hitting the market same time for the same fund, and other non-banks like the Nigerian Breweries (NB) also considering doing a rights issue, the consensus amongst many operators is that the market is entering an era of anticipated heavy sell-off by investors after the earning season as investor switch from equities to fixed income, especially in a year where banks will not make as much windfall from FX gains like in 2023.

Over 20 deposit money banks in Nigeria will need to raise an extra N2.5 trillion or more to meet the apex bank’s requirement.

The operators argued that the market will support only banks that have shown consistency, good performance and a track record of paying dividends over the years will get the attention of investors.

It is on this basis that the first movers in the fundraising programmes come to focus. Access Holdings Plc, the biggest Nigerian financial institution, has made the first move, seeking to raise $1.5 billion to shore up its capital.

With a share capital and share premium of N251 billion, Access needs to raise additional N249 billion. The bank has unveiled plans to raise additional N365 billion through rights issues under the $1.5 billion blend of capital-raising programme.

Rights issues or placements alone may not be sufficient to raise this capital, hence the group is seeking a combination of both rights issues and public offers to investors.

The options available to Access Holdings for its capital raising programme are rights issue offers for subscription and equity placements, and from all indications, the bank will exercise all the options to achieve its objective.

A rights issue will preserve the current ownership structure of the company. Offer for subscription may have a diluting effect bringing in new shareholders via an open public offering or through a book-building method where only selected investors bid for the issue before opening to the investing public.

The placement of new issues can be used to raise fresh funds when the offering is addressed to selected institutional and high-net-worth investors.

Access Holdings has embarked on inorganic expansion across Africa over the last three years, acquiring subsidiary businesses all over Africa. This has made the bank bigger and reduced its geographical risk, achieving this came with lots of spending, which the capital raise will help fill the gaps. In the 2022 financial year, the bank achieved a dividend leap from N1 per share to N1.5 per share for the first time and in 2023 it leaped further to N2.1 per share.

Access was the first bank to publish its full for last year’s account, and the first to pay dividends.

Notwithstanding the challenges, operators have argued that the consistent improvement recorded by the tier-one bank over the years would attract institutional investors, portfolio investors, high-networth individuals and retail investors to the bank.

Access is a continental bank that is exposed to foreign risks. This underscored the need for it to be highly capitalised to match up with its risk profile.

With new capital injection, the bank can further diversify its assets portfolio, enhance income-generating capacity, remain competitive in various markets and safely consolidate its expansionary vision.

Before the recent directive from CBN for banks to re-capitalise, Access had nursed the idea. The regulatory compulsion has now expedited actualisation of the program. It is coming at a time when the financial economy is saturated with liquidity which favours institutional investors, but retail investors may find it difficult to pick up the rights due to their severely eroded purchasing power.

The depreciation of the naira is an advantage that their foreign investors may exploit since Access is an international bank spread across the African market.

Financial experts said that market conditions will determine the approach of individual banks raising money. However, they argued that some of the banks, including Access at the moment, can still raise money at a lower cost of equity, provided the current high-interest rate regime does not escalate into a prolonged high cost of capital in the economy, at worst, should moderate in the immediate to near term.

Considering the bank’s successes as it continues to push towards its goal of becoming Africa’s payment gateway to the rest of the world, amongst other high-end goals, and based on the bank’s antecedents from achieving previous goals, operators believe that the bank is positioned for success.

Its 2022-2027 strategic plan aimed at solidifying its business verticals – payment, loan, pension fund, and insurance brokers, to capitalise on its already established goodwill in the bank will continue to be the foundation of the Holding and the eye of the storm, having transformed to become a leading financial and ecosystem player, with its core business as the foundation.

With the establishment of the Opcos and geographical diversification into other world financial and trade hubs such as London, Dubai, Hong Kong, Lebanon, Beijing, and Mumbai to name a few, as well as expansion into other African countries such as Kenya, South Africa, and Ghana, amongst others, the Holding Company (Holdco) in its strategic plan would enable the bank to diversify both business-wise and geographically.

The bank also plans to increase revenue in its African banking subsidiaries, while its business verticals will account for only 12 per cent of its revenue in 2027.

In its full-year 2023 result, Access posted a profit after tax of N612.4 billion, representing 300 per cent rise when compared to N153 billion achieved in the corresponding period in 2022. Its gross earnings also increased by 80 per cent to N2.6 trillion, from N1.4 trillion achieved in the previous year.

The improved performance was attributed to the good valuation and foreign exchange gains of over N628.9 billion recorded in 2023, over N335.5 billion achieved in 2022.

Also, Guaranty Trust Holding (GTCO) has concluded an arrangement to seek shareholders’ approval for fundraising to the tune of $750 million to meet the apex bank’s new target.

In a notice filed to the Nigerian Exchange Limited (NGX) ahead of its forthcoming yearly general meeting, the bank is to raise the additional capital of up to $750 million through the issuance of securities comprising ordinary shares, preference shares, convertible and/or non-convertible notes, bonds or any other instruments, in the Nigerian and/or international capital markets.

Head Equity, Planet Capital, Paul Uzum said: “It will be a tough one because of the high-interest rate environment. More so, all the banks are hitting the market at the same time, while the likes of NB have clearly said they are raising N600 billion from the same market.

“However, banks like Access, GTCO and Zenith Bank that have been consistent over the years will not find it difficult to raise the requisite capital.”

Like Access, GTCO plans to raise $750 million through a public offer to support the capital base of its banking subsidiary, Guaranty Trust Bank (GTB).

According to the company, the capital raise shall be by the issuance of securities which consists of ordinary shares, preference shares, convertible or non-convertible notes, bonds or any other instruments in the Nigerian and international capital markets.

In a notice on Friday, GTCO said it would hold its third annual general meeting (AGM) on May 9 to vote on the decision to raise capital and other special business.

“Whether by way of public offerings, private placements, rights issues and/or other transaction modes, at price(s), coupon or interest rates determined through book building or any other acceptable valuation method or combination of methods, in such tranches, series or proportions, within such maturity periods and at such dates and upon such terms and conditions as may be determined by the board of directors of the company (the board), subject to obtaining the requisite approvals of the relevant regulatory authorities.

“That the board is and is hereby authorised to seek the listing and admission to trading of securities issued under the foregoing resolution, on the official list of the Nigerian Exchange Limited, the London Stock Exchange plc or on such other stock exchange or exchanges or securities market or markets (as the case may be),” the bank said.

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