Analysts remain optimistic despite doubts around the possibility of banks raising an estimated N3 trillion from the Nigerian Exchange (NGX) giving that Banking Index declined by 7.67 percent year-to-date compared with a rise in the NGX All-Share Index of 31.3 percent.
The Central Bank of Nigeria (CBN) had in March issued a guideline for banks’ mandatory recapitalisation aimed at repositioning the banking system ahead of the Federal Government’s dream of achieving a $1 trillion economy by 2030.
A herd of analysts from Coronation Research said it is not out of proportion to what can be raised.
According to the analysts, “We believe they can. One good reason to think this lies in the arithmetic of rights issues. The market values most Nigerian banks at a discount to their published book values. This is a problem for existing shareholders when it comes to rights issues, because more shares have to be sold in order to raise a given sum of money than would be the case if the shares traded at book value (a price-to-book, or P/BV, of 1.0x).
“This is known as the dilutive effect and it is the reason bank stocks retreated after the announcement on March 28.”
The flip side of this is that what is dilutive for existing shareholders is accretive (value-adding) for incoming shareholders. If a bank’s rights issue price values it at 0.50x book value (P/BV=0.5x) then an incoming shareholder buys twice as much book value as they would if the valuation was 1.00x book value. This provides new shareholders a significant incentive to buy new shares, they stated.
The analysts further observed that this leaves open the question of the sheer amount of money to be raised (there is a compelling logic to buying new shares, but the money must still be found).
“Take a sum like N3.0 trillion, which is just shy of $2.0 billion. It may sound like a lot but pales in comparison with other metrics such as the value of prime real estate in central Lagos (surely, many times higher) and the market capitalisation of the companies listed on the NGX Exchange at some N55.91 trillion. While we are not saying that raising money is easy, the sum to be raised does not appear to be out of proportion to what can be raised.
The analysts also considered the lot of an investor in listed Nigerian bank shares. 2023 was a glorious year, with the NGX Banking Index gaining 108.7 percent compared with the NGX All-Share Index’s return of 45.9 percent.
They, however, said 2024 has not been so kind, with the NGX Banking Index down by 7.67 percent year-to-date compared with a rise in the NGX All-Share Index of 31.3 percent. If investors were hoping for 2024 to be another year of stellar performance for banks, then the Central Bank of Nigeria’s (CBN) circular of March 28 put paid to that.
The circular requires a high level of recapitalisation of banks, not based on their total shareholder’s funds but on their initial paid-up capital.
“At first, many market participants questioned the logic of excluding retained earnings in a calculation of total shareholders’ funds, but these arguments had to be put aside as banks accepted the CBN’s requirement.
“Our initial calculation was that banks, in aggregate (and unless they merged to form larger entities), were being asked to raise over N3.0 trillion in fresh equity. (The combined market capitalisation of the banks on March 28 was N8.1 trillions),” Coronation Research analysts noted.
Meanwhile, most banks are not finding it easy in the process. Fidelity Bank Plc has extended its capital raising offers earlier scheduled to close on Monday, July 29 to August 12, amid a decline in its share price.
The two-week extension was confirmed by the bank’s media and internal communications team lead, Adebowale Banzi, on Monday, July 29.The bank also disclosed it had gotten the approval of the Securities and Exchange Commission (SEC) for an extension after the 28-day initial offerings closed on Monday, July 29.
On June 20, Fidelity Bank opened its application for an N127.1 billion combined rights issue for existing investors and a public offer for new investors.
The capital raising is to enable the bank to meet the CBN’s minimum capital base of N500 billion.
Fidelity Bank’s combined offer comprises a rights issue of 3.2 billion ordinary shares of 50 kobo each at N9.25 per share and 10 billion ordinary shares of 50 kobo each to the general investing public at N9.75 per share.
The rights issue is allocated based on one new ordinary share for every 10 existing ordinary shares held as of the close of business on Friday, January 5 this year.
However, on Monday, July 29, Fidelity Bank’s share price closed at N10.65 from N10.85 when it opened its capital raising offer on June 20. This shows that the share price of Fidelity Bank has lost 0.2k within the 28-day trading offer.
Among other banks, First City Monument Bank (FCMB) Group Plc has launched a public offer to raise N110.9 billion in additional capital through the issuance of 15.197 billion shares at N7.30 per share. This move is part of the bank’s comprehensive plan to meet the CBN’s capitalisation requirements.
The Group CEO, Ladi Balogun, explained that the public offer is the first phase of a three-phased approach to raise up to N397 billion in additional capital. The second phase involves selling minority interests in one or two of its subsidiaries, aiming to raise between N80 to N100 billion.
The final phase, set for the end of 2025, will involve a private placement with identified potential investors.
The proceeds from this capital raise will primarily drive business growth, focusing on lending to key sectors such as agriculture, small and medium-scale enterprises (SMEs) and non-oil exports.
The success of this offer will be crucial in achieving the bank’s goals and sustaining earnings per share for investors.
As a follow up, the CEO of NGX, Jude Chiemeka, expressed confidence in FCMB’s capital raising plans and urged stakeholders and potential investors to leverage the NGX Invest platform to partake in the public offer. He highlighted the Exchange’s efforts in ensuring a seamless process and deploying technology to drive a digital Exchange.
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