November 26, 2018/Fitch Ratings
Large Nigerian banks’ early redemption of Eurobonds highlights the improvement in their domestic foreign-currency (FC) liquidity, as well as a lower appetite for FC loans among borrowers, Fitch Ratings says. With FC liquidity becoming less of a risk for banks, asset quality is again the main risk for Nigerian banks as it remains vulnerable to a fall in oil prices.
FC liquidity risks have receded for Nigerian banks since the introduction of the Investors and Exporters (I&E) window in April 2017, which created a market-driven price for foreign-exchange trading. Nigeria’s foreign-exchange regime is a multiple exchange-rate system with an official exchange rate of NGN305/USD. This compares with a market-driven rate that has been broadly stable at about NGN360/USD since end-2017.
A more transparent mechanism for portfolio investors and exporters to sell FC to willing buyers has supported inflows of hard currency. Transactions in the I&E window had reached USD56.2 billion by end-June 2018, largely from foreign portfolio investors, domestic exporters and the central bank. Higher oil prices and reduced disruption to oil exports have also boosted FC liquidity, as local oil producers have begun to ramp up operations.
Nigerian banks have USD3.6 billion of outstanding Eurobonds, maturing mostly in 2021 and 2022. In August 2018, First Bank of Nigeria called its USD300 million Eurobond before final maturity in 2020, while Guaranty Trust Bank has recently redeemed two bonds early. We believe most banks have enough FC liquidity to call or redeem their upcoming Eurobonds before they mature, with limited need for refinancing given the lack of opportunities for deployment of FC.
Yields on Nigerian Eurobonds have rallied this year despite global tightening financial conditions and uncertainty across emerging markets. There are some notable exceptions, such as Diamond Bank, which has suffered from weak capitalisation, the resignation of four board members and unconfirmed press reports of conditional offers from potential suitors, which the bank has denied. Diamond Bank’s USD200 million Eurobond, which matures next near, represents significant refinancing risk, in our view – a factor reflected in the bank’s ‘B-‘/Negative rating.