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The Markets in Review: Does the Global Banking Crisis Impact Nigeria? – Coronation Research

Mar 28, 2023   •   by Coronation Research   •   Source: Coronation   •   eye-icon 239 views

This month has seen two US banks and one large European bank go bust. As we know, banking crises are contagious and can spread around the world. So, what is the risk for Nigeria? Our answers are that Nigeria’s direct exposures to this crisis are probably limited, though there are some indirect risks worth considering. 

 

Does the Global Banking Crisis Impact Nigeria?

What a difference a month makes. In late February economists were worried by nothing more than whether the global economy would grow by 2.9% or 2.7% this year; oil prices were US$83.9/bbl (Brent crude). In late March we have a significant banking crisis in the US and Europe; global growth is questionable; oil prices are US$75.0/bbl. 

 

Does this affect Nigeria? Our answer is that the US and European banking crises are unlikely to have direct effects on the Nigerian banking system. We also think that the Federal Government of Nigeria’s bonds will be barely affected by this. There may be some indirect effects, however, if the US and European banking crises negatively affect global growth and, in turn, cause oil prices to settle below the US$75.0/bbl level which is assumed in Nigeria’s 2023 budget. Such an indirect effect would take time, several months, to materialise. 

 

What has happened? 

In early March Silicon Valley Bank (SVB) of California experienced a run on its deposits. It had suffered losses on its portfolio of long-dated US bonds which were financed with short-term deposits. It had attempted to raise fresh capital but failed to do so. Some of its depositors started removing their money and its share price fell sharply. On 10 March the Federal Deposit Insurance Company (FDIC) took over SVB; this was the largest bank failure since the global financial crisis of 2008. Another US bank, Signature Bank, soon failed and liquidity issues (i.e. withdrawal of customer deposits) affected several other US banks


 

 


Meanwhile, in Switzerland, things were going wrong at banking giant Credit Suisse. According to the Financial Times, Credit Suisse had seen its depositors withdraw SFR111 billion (US$102 billion, or Naira 47 trillion) during the final quarter of 2022, and two weeks ago withdrawals were running at SFR10 billion per day. The Swiss National Bank gave emergency funding to Credit Suisse which was then sold at an agreed price of US$3.25bn (N1.48tn)to rival UBS just over a week ago.

 

Regulators and authorities tried to restore confidence with assurances that, after the crisis of 2008, banks are much better capitalised than before. But, as events this month have shown, capital has little to do with it. Banks go bust when they run out of liquidity. The trouble starts when depositors lose confidence and begin to remove their money. 

 

How contagion works 

As this month’s events has shown, bank contagion is international and can spread fast. The problems in the US clearly forced the issue in Switzerland where Credit Suisse had been experiencing problems for several years. 

 

Large banks tend to diversify their sources of finance by borrowing in many different markets or by issuing bonds in international markets. On the other side of these transactions are other banks (as well as non-bank financial institutions and individuals) that lend to banks or buy banks’ bonds in the interests of yield and diversification. When a bank goes bust its loans and bonds might be held by a bank in another country or another continent, and these losses need to be reported to authorities and are often made public (think of quarterly results). 

 

So, to check whether Nigeria is likely to be affected by the current crisis we first need to ask whether it is likely that they hold bonds issued by the likes of SVB, Signature Bank and Credit Suisse. In our experience, Nigerian banks tend not to hold such international bonds: rather, their US dollar liquidity is usually tied up in US dollar loans to Nigerian industries, often in the oil & gas sector. We rate the risk of an immediate and significant write-down in US dollar loans issued by foreign borrowers and held by Nigerian banks as low. 

 

Nigerian banks could be exposed if their US dollar borrowings, or the US dollar bonds they issue, held by international banks (many Nigerian banks have credit lines with international banks), cannot be renewed. This issue (i.e. non-renewal of loans and bonds) could materialise if foreign lenders become overly-sensitive to emerging market risk as a result of the crisis. On this point it is important to understand that Nigeria, as an emerging market, has fared much better than the likes of Ghana, Pakistan, Turkey and Sri Lanka recently. It is considered one of the better credits among its peers so we do not put very much weight on this risk. 

 

This being the case, we would not expect a negative impact on the borrowing costs of the government of Nigeria itself, or at least not much. It is true that global markets are less keen on risk than they were a month ago, but we believe that investors in Federal Government of Nigeria (FGN) Eurobonds are quite specialised and understand the risks of Nigeria as distinct from those of risky assets generally. 

 

Now that we have mentioned Ghana, we must recall the profound restructuring of Ghanaian public sector debt at the end of 2022. We anticipate that some Nigerian banks will suffer write-downs on Ghanaian positions when they report their 2022 results, but we do not expect these to be significant in the context of large Nigerian banks which, these days, earn their group profits in many different African nations.

 

Is it all over?

This is not to say that the crisis in the US and Europe will be over any time soon. Banking crises have tentacles: time passes before we know where those tentacles are. Credit Suisse had a class of bonds called AT1 on which it intends to default, and the outstanding amount is some US$16.0 billion. It is not known exactly which individuals and institutions hold them (though we will have an idea soon because some holders intend to sue). During times of crisis banks tend to review their credit guidelines, so we expect an all-round tightening of credit terms across developed markets. 

 

This is one reason why oil prices have been falling. If the secondary effects of the banking crisis run deep then expect credit to industry, trade and property in the US and Europe to get tight, resulting in lower economic growth than currently forecast, dampening demand for oil and, unless there is concerted action by OPEC and its ally Russia (OPEC+) to cut production, leading to price falls. This is one area in which Nigeria may be exposed, though it is an effect that would take several months to show up in the nation’s finances.

 

FX

Last week, the exchange rate at the Investors and Exporters Window (I&E Window) lost 0.11% to close at N461.33/US$1. Elsewhere, the foreign exchange (FX) reserves of the Central Bank of Nigeria (CBN) decreased by 0.56% to US$35.78bn, as the CBN continues to intervene across the various FX windows. 

 

This does not seem to be the time for a change in CBN policy, in our view. The CBN is likely to continue with its policy of gradual loosening of the I&E Window rate while managing FX reserves at close to their historic highs. We expect only small FX rate adjustments over the coming weeks and months

 

Bonds & T-bills

Last week, the Federal Government of Nigeria (FGN) bond secondary market was bullish as the average benchmark yield for bonds declined by 8bps to close at 13.19%. Across the curve, yields declined on the 7-year bond (-3bps to 14.13%) and the 10-year bond (-15bps to 14.13%). Elsewhere, yields on the 3-year bond expanded by 13bps to settle at 12.03%. We link the market’s performance to participation from investors who lost bids at the primary market auction on Monday. 

 

At the FGN bond auction, the Debt Management Office (DMO) offered N360.00bn (US$777.82m) across the February 2028 (bid-to-offer: 0.8x), April 2032 (bid-to-offer: 0.3x), April 2037 (bid-to-offer: 4.0x) and April 2049 (bid-to-offer: 3.9x) maturities with most of the demand skewing to the longer-dated bonds (20-year and 30-year bonds). 

 

Demand was slightly lower than at the last auction in February, as reflected by a total subscription of N808.6bn (N992.1bn) and a bid-to-offer ratio of 3.88x (vs 3.95x at the last auction). Consequently, the yields on the April 2032 (-15bps to 14.75%), April 2037 (-70bps to 15.20%) and April 2049 (-25bps to 15.75%) declined while the yield on the February 2028 expanded slightly by 1bp to 14.00%. Our view remains that elevated Federal Government domestic borrowing will drive yields upwards over the course of the year. 

 

Activity in the Treasury Bill (T-Bill) secondary market was bearish again as the average yield for T-bills rose by 44bps to 5.80%. The yield on the 349-day T-bill closed at 8.66%. At the Tbill auction this week, the CBN is expected to roll over N145.47bn worth of bills. Elsewhere, the average yield for secondary market OMO bills expanded by 101bps to 4.02%.

 

Oil

Last week, the price of Brent rebounded by 2.77% to settle at US$74.99/bbl. Nevertheless, Brent is down 12.71% year-to-date and is trading at an average of US$82.44/bbl, 16.80% lower than the average of US$99.09/bbl in 2022. 

 

Ending two consecutive weekly losses, oil prices rose following renewed confidence in the efforts of global banking regulators to contain the contagion of bank failures in the US and Europe. This offset worries that the interest rate hike by the US Federal Reserve would lead to a fall in demand. The prospect that the Organisation of the Petroleum Exporting Countries and allies (OPEC+) may cut output at Its next meeting on 3 April supported prices. We maintain that for the most part of the year, prices are likely to remain well above the US$75.00/bbl set in Nigeria’s government budget

 

Equities

Last week, the NGX All-Share Index lost 0.04% to settle at 54,892.53 points. Consequently, its year-to-date return slipped to 7.11%. International Breweries (-6.45%), Cadbury Nigeria (-5.83%) and Stanbic IBTC (-5.76%) closed negative while Geregu Power (+6.25%), Oando (+3.66%) and Lafarge Africa (+3.39%) closed positive. 

 

Performances across the NGX sub-indices were broadly negative as the NGX Consumer Goods (-0.74%) sub-index led the losers, followed by NGX Insurance (-0.53%), NGX Industrial Goods (-0.49%) and NGX-30 (-0.16%) sub-indices. The NGX Oil & Gas (+0.00%) sub-index closed flat while the NGX Banking (+0.93%) and NGX Pension (+0.16%) sub-index closed positive. 

 

Model Equity Portfolio

Last week the Model Equity Portfolio gained 0.12% compared with a fall in the NGX All-Share Index of 0.04%, outperforming it by 17bps. Year-to-date it has risen by 8.16% compared with a rise of 7.11% in the NGX All-Share Index, outperforming it by 106bps.

 

 

Last week, the market extended losses for the second consecutive week, driven especially by selloffs in BUA Cement and Stanbic IBTC of which we are both underweight. These losses eroded gains in Zenith Bank and GTCO which we have overweight positions. These fortunate matchups earned us a positive weekly return as opposed to the market's negative return. We are pleased with the rebounds in these banking names as it appears the world is heaving a sigh of relief, following significant global regulatory interventions to stem systemic contagion in the banking sector. In addition, FY 22 earning reports of Nigerian banks are underway and investors are, as expected, positioning ahead for their dividends. 

 

We are also pleased with the positive attribution from Geregu of which we are currently index neutral. We plan no changes this week


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