Axis Bank Forex Branches
The main risks to be seen in the financial sector in Nigeria for the second half of 2010
Inflation
This is the biggest risk facing the Nigerian financial sector in the future. Several factors combine to inflate the Nigerian economy. These factors include a huge budget deficit about 35% of the budget, and about 5.3% of GDP which has no clear source of funding. The federal government is planning a N500 billion capital-raising in international markets, this is only one third of the projected deficit still leaving about a billion naira to the government will have difficulties funding. Considering this is an election year, the cost of public efficiency is expected to be lower than their traditional low as politicians, it seems more the curves of money for election campaigns in production companies.
Although President Jonathan has presented a proposal to the Assembly National budget for reduction of N4.6 trillion to N4.2 trillion, while he also submitted a supplementary budget about N600 million. It follows the final budget expenditures for 2010 amount to about N4.8 billion higher than original budget the government is trying to reverse downward. Much of the supplemental budget increase will go to higher salaries for civil servants, a good source of inflationary pressure in the economy.
Already the economy is sitting on a N650 million bank bailout cash from the Bank Central Nigeria in an attempt to rescue the banks said to be in a serious situation. The CBN also has another N500 million set aside to invest in the real sector, while the Asset Management Company, which is expected to toxic assets off banks' balance sheets is expected to be another source of liquidity in the system.
The situation is also complicated by the fact that the CBN in an attempt to unlock the credit market has deliberately kept its benchmark interest rate at least 6%. CBN's ability to increase this rate is limited by his desire to unlock the credit markets. In the future, the CBN must maintain a delicate balance between the threat inflation risk and the need to open the credit market. The AMCON which is the key to the CBN to unlock the credit market will very likely also CBN greatest threat to unlock the inflation dragon, as it not only pump liquidity into the financial system but also, possibly, to free the banks to lend again causing more inflation and economic cooperation, possibly.
Other sources of inflation risk in the system include possible liberalization of the transformation sought by the federal government, as well as the possible increase in electricity tariffs except it goes to the supply increasing energy. It will be res judicata for industry if not the deregulation of downstream sector, the deregulation of power supply tariff and poor, same time.
Naira depreciation
The macroeconomic management of the Central Bank of Nigeria (CBN) will a great challenge if crude oil prices fall lower. Some analysts have said that better CBN's strategy to combat rising inflation will appreciate the Naira. What are the chances that the Naira appreciating CBN? The Naira has benefited recently from the financial crisis in Europe that has seen the weakness in the euro and pounds to improve the exchange rate of Naira. But in the future, the fate of the Naira is linked to crude oil. The CBN has the force defended the value of the Naira in the last year with a strong intervention in the interbank market. This has been helped by rising oil prices in the period, the source of 90 percent of foreign exchange earnings Nigeria.
The strong defense of the Naira by the CBN, however, has its downside. Rapid depletion of the country's external reserves which now averages the 38 billion U.S. dollars sufficient to cover 16 months of imports. Although this is still healthy and well above the minimum of four months to cover the need for reserves external, higher capital flight during an election year driven by public sector corruption and uncertainty in the banking sector even more pressure on reservations.
The recent sharp drop in crude oil prices witnessed in international markets has also increased uncertainty on crude oil prices. If crude oil prices fall further and stays low, it is uncertain whether the CBN generously to defend the value of the Naira as it has done.
Continuing credit freeze
CBN Can unlock the credit market? The CBN is banking AMCON to do this. AMCON The bill has been approved by both houses of the assembly, but it has to be harmonized and signed into law by the President. The former this can happen is the end of July, taking into account the rate at which the National Assembly and the presidency and also works in the hope that the assembly did not insert a clause that the President will refuse consent to the bill.
But even if AMCON be operational by the end of July, it is possible for two months to take off and maybe another two months to start buying toxic assets. That takes us to the end of the year. What this means is that any hope of release AMCON the credit market will not happen this year. Best case scenario is the first quarter of next year.
What are the options CBN open to unlock the credit market? Not many. Moral persuasion in the uncertain economic climate will have no effect on loans bank. Direct loan guarantees as the CBN is doing with his N500 million real sector funds can help, but runs the risk of creating easy credit with a high risk of crime in the future.
In addition to the eight banks taken are still largely outside the circle of credit. They continue to operate out of this loop until the current owners, the challenges for management and recapitalization are fully resolved.
Lower bank earnings
Bank earnings remain under pressure during the rest of the year raises the question of how time banks will maintain a level of operations in the low current gains in the sector? The key question is what will suffer more cuts, low international expansion branch near or close? Will depressed earnings strength of consolidation in the banking industry or shared services as directed by the CBN?
With banks not to extend new credit, existing credit deterioration of a very fast rate banks are beginning to depend on earnings base fee for survival. But with the traditionally based fee income by almost 30% to 40% of revenues, operating costs and not to yield, banks will under pressure on how to maintain their current level of operations. Already some banks are considering rationalization branch, following the dismissal of staff earlier this year.
Unsolved bank recapitalization
CBN's insistence that allow shareholders to recapitalize Banks took over has led to a stagnation of recapitalization of the banks concerned, even in the interest of foreign investors to buy the banks seemed have decreased.
foreign investor interest in the acquisition of banks taken seemed to have vanished in part because of the risks buying by banks with a number of cases in courts against the actions of CBN to take over banks and the number of regulatory policies has changed the status quo in the banking sector in Nigeria.
Some policies include the reclassification of the banks in which the NCB seeks license banks with minimum capital as low as N15 million, compared to the current N25 billion and implementation of a maximum of two terms of five years each of the directors of banks. Foreign banks wishing to enter the banking market in Nigeria may be wondering if it is easier to take a fresh regional banking license to N15 billion in the lucrative Lagos-axis west-east of the Nigerian economy rather than buying a bank taken over with all its attendant problems legacy. The subject tenure of a managing director at the discretion of the CBN may also have dampened foreign investor passion for the Nigerian market.
While the eight banks, which constitute about 40% of Nigeria's banking sector remain capitalized and managed by the CBN appointed management, the operational level will remain under deprive type the Nigeria economy a vital source of credit.
Wema Bank, Unity Bank, Savannah Bank and SGBN
How CBN is going to handle unresolved issues around these recapitalization of banks? Wema Bank and Unity narrowly escaped being acquired by the apex bank 2009, when it conducted its banking units Sanusi shake. Both were delivered in June 2010 to recapitalize. Currently, a few days to the deadline, both banks are in the process of obtaining fresh capital to escape the ax hanging from the apex bank? The key issue is that they do it?
If successful, the question will be credible, why should other shareholders of the banks taken eight on not given a similar option? If unsuccessful in recapitalization attempt, which the CBN rock confidence in the financial industry by adopting new about them?
In the case of Savannah Bank and SGBN, won lawsuits against the apex bank that gave them a respite to the June 2010 recapitalization. There are indications that the banks can not succeed in achieving its objectives recapitalization.
How do you manage the challenges CBN recapitalization of banks are sent either right or wrong signals to international and local investors and the banking community?
About the Author
Finance and communication specialist with experience in banking, research and financial analysis and media. Academic qualifications include an M Sc in Banking and Finance, a Bachelor’s Degree in Finance and professional affiliation to the Chartered Institute of Stockbrokers (CIS level I) and the National Investor Relations Institute (NIRI) United States. Good computer skills- Microsoft Excel, Access and Word-. Won four different merit awards in financial journalism