Banking sector is top watch
For the business community, one area that they will be paying keen attention in 2011 will be the Nigerian banking sector. Would the crisis plaguing the sector finally be put to rest? The banking sector remain vital to the survival of businesses and how the crisis currently preventing the banking sector from playing their critical role in the Nigerian economy is resolved in 2011 will be important.
The critical issue that the business community will be watching in the sector is the impact that the removal of the toxic assets of banks will have on financial stability and credit expansion. Will the expected freeing of banks from their toxic assets load lead to expansion in bank credit to the real sector?
Our take is that taking toxic assets off bank’s balance sheets is accounting decision that AMCON has already taken but lending is a management decision which will largely depend on the managements of the respective banks and their risk appetites. Lending will return but very slowly in 2011 as banks both rescued and non rescued get their risk management processes together.
August 14 is a date to watch as the tenure of the managing executives installed in the intervened banks expires. Would they require an extension of their tenure of would they be handing over the banks to new or existing shareholders?
June 30 is another date to watch as the CBN guarantee of all interbank transactions expires. Would this guarantee be extended or would the banking crisis have been resolved well enough for the CBN to take off the guarantee?
Another issue in the banking sector is the likely emergence of new owners and new players in the Nigerian banking sector. Several of the rescued banks are said to be in negotiations with local and foreign buyers? How would this new owners impact on the banking sector? What new business models and practices are we likely to see especially from new foreign entrants?
Our take is that local banks that succeed in their acquisition bid for the rescued banks will see their normal business processes disrupted for better part of 2011 and even beyond 2011 as they merge their operations with the acquired banks especially the smaller banks that seek acquisition of bigger banks like Oceanic, Intercontinental and Afribank which are all being courted by local banks.
The judicial aspect of the banking crisis will have to be watched closely? How would this impact on the resolution of the banking crisis especially if any of the cases in court goes against the Central Bank of Nigeria (CBN)? What happens if it involves a bank in which the acquisition process is already complete? Our take is any loss of any of the cases in will disrupt the resolution of the banking crisis in the shape the CBN is pursuing.
Another critical issue in the banking sector is the planned disposal of subsidiaries following the directive by the CBN that banks concentrate on their core banking activity. BusinessDay estimates show that 50 banking subsidiaries worth close to N200 billion will be up for sale in 2011. This directive also affects the Insurance Sector which has also been directed by the regulator, the National Insurance Commission (NAICOM) to dispose off their non insurance subsidiaries.
The implication is that there will be a lot business buying opportunities in Nigeria ‘s financial sector in 2011. Entrepreneurs seeking bargain buying opportunities in the Nigerian financial sector have an opportunity here. The downside however is that banks may be bugged down trying to sell this subsidiaries and realigning their businesses to the new banking regime or to their preferred business model. Banks are to become regional, national or international banks. So far only Wema Bank has decided to become a regional bank.
Also to be watched closely is the relationship between the CBN governor and the national assembly. The national assembly will not forget in a hurry the CBN governor’s expose that they are costing the nation too much of its revenues. They want their pound of flesh back and that may happen as soon as they get back their seats in the house. Watch out for a possible enquiry into the banking reforms and possible moves to amend the CBN act? This may prolong the resolution of the banking crisis beyond 2011.
Another critical issue to watch is how the asset management company goes about recapitalising the rescued banks. What will be the nature of any capital injection by AMCON? Will it be tier 11 convertible loan capital, preference shares or ordinary equity? The nature of capital injected will determine what existing shareholders in the rescued banks eventually control in the banks?
Crowding out effect of government borrowing
The year 2010 has largely been marked by heavy borrowing by the Federal Government through the use of bonds. The government is estimated to have raised more than a trillion naira through bonds in 2010 most of which went into financing its deficit spending estimated at more than N2 trillion in the out going year. 2011 is not going to be any different as the Federal Government will still finance a budget deficit in excess of a trillion from bond issuance further giving banks an alternative risk free outlet for their deposits.
The business community should expect to continue to compete with the Federal Government for bank finance in 2011. With most banks just emerging from selling off their toxic assets to AMCON, their willingness to take on new risks will be low. The implication is that most banks will prefer lending to the government both at the Federal and State level and with the Federal Government willing and ready to borrow heavily in 2011, most banks will be directing their loans to fund the federation account deficit in 2011.
The 2011 elections
Will 2011 elections be conclusive, free and fair? Are we likely to see legal challenges to the crucial presidential elections dragging? This will be critical for business confidence in 2011. The freer and conclusive the 2011 elections are, the faster business confidence will be restored. A conclusive, free and fair election will be a significant boost to business confidence 2011.
There are however strong expectations that the 2011 elections will be a more credible elections than elections seen in the recent past. The support and increased focus of the international community, the credibility of the new INEC chair, the on going process to have a more credible computer based voters register and the general interest of most Nigerians to vote and make their votes count in the 2011 elections will lead to the conduct of a more credible election in 2011. The question though is if it will be conclusive as Nigeria ‘s opposition for the first time since the return of civil rule in 1999 have their best chance of capturing power at the centre if they can put their acts together. See a united opposition to give the ruling party a run for its money is however like squeezing water from a rock.
Are we likely to see increased inflationary trend in 2011? The probability is a higher inflation rate than lower. Election spending is the biggest push for inflation in 2011. Deficit financing by the federal government will be another push. Also feared is the possible impact of AMCON as they clear toxic assets off banks balance sheets and free banks to start lending to an economy already awash with liquidity. Then there is the possible impact of the new minimum wage that the federal government intends implementing for Federal workers. It is also likely that the Federal Government may move to remove subsidy on fuel in 2011. However, the government may not have the political will to do this before the 2011 elections so this may not push into inflation until later part of 2011. The expectation is that inflation rates will remain at double digits in 2011.
The chance that lending rates will trend higher in 2011 is higher than the possibility of it dropping. First critical mover for higher lending rates in 2011 will be the most likely move by the CBN to raise its Monetary Policy Rate (MPR) at its next meeting on January 24 and 25, the benchmark lending at which CBN lends money to Nigerian banks. There are two reasons that will make the CBN raise the MPR at its next meeting. The first will be to pre empt the likely inflationary aspect of election spending and secondly to make it more expensive for the Federal government to continue financing its deficits through the issuance of bonds. Increasing the MPR will push up lending rates to the entire economy. The MPR is currently 6.25%. The CBN may raise it to 7% at its next meeting.
The Naira Exchange Rate
The official rate of the Naira to the USD in 2011 will likely average N155 as against the Federal government official projection of N150 to the USD. Two factors are likely to lead to a drop in the Naira against the USD. The CBN may not be as strong in defending the currency as it has done 2010 if the current demand pressure on naira is sustained. The dollar may also strengthen marginally in 2011 as the effect of the Federal Reserves quantity easing initiated in 2010 eases off. With the current level of external reserves, at about US$ 33 billion which represents an annual drop by more than US$ 10 billion despite record crude oil prices, any continuous defence of the naira may deplete the external reserves to levels that will create a speculative run on the Naira which the CBN will want to avoid by allowing the depreciating the Naira gradually than allow a sudden fall.
Crude oil prices
Nigeria ‘s revenue is currently highly susceptible to any fall in crude oil prices mainly due to the fact that the excess crude account which is to act as a buffer in case of drop in crude oil prices has been depleted. The implication is that any future drop in crude price will immediately translate into a drop in federation revenues and stress on government expenditures which is also largely recurrent. The good news however is that crude oil prices are expected to remain high in 2011 mainly on the back of a weak dollar rather than global economic growth. Barclay’s capital projects an average crude oil price of US$ 91 in 2011.
Businesses however will have to keep a keen eye on any possible drop in crude oil prices and how it will affect their business projections in 2011. Any drop in crude oil prices will likely lead to a drop in the value of the naira, non implementation of key aspects of budget 2011 and possible labour crisis all over the federation as government expenditure comes under pressure. Business scenario analysis should factor this into their projections for 2011.
Religious and ethnic strife
Militancy in the Niger Delta and religious riots in Northern parts of Nigeria as well as kidnapping in the South East will all be key business risks in 2011. The expectations are that militancy and kidnapping may not be as critical issues as they have been in the past as the government clamps down on the major king pins in this trade and as politicians feel the hit of giving clandestine support to these groups.
However, religious riots may become a big issue in 2011 especially in Northern Nigeria and with the expected emergence of Jonathan as President in 2011. The chances are that politicians are likely to use political discontent to fuel religious discontent. The capacity of the security forces to handle this is in doubt especially with their failure to prevent recurrent crisis in Jos even after being on the ground for more than a year. There is also the suspicion that the security forces are taking sides in these conflicts. Businesses will have to incorporate the higher cost of a operating in a low security environment especially in Northern Nigeria in 2011.
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