There is a huge problem in the banking sector in Nigeria. Excluding Zenith Bank and may be one other bank, GTBank can buy all the banks in Nigeria, at the present market capitalization values. Tier II banks are now going through a period where they cannot make money because the Tier I banks are pricing them out with better products. This is the beginning of a vicious circle which the Tier II banks have no way to get out. As profit erosion exacerbates through the fintech, many Tier II banks could collapse, if actions are not taken. We may be seeing fewer banks in Nigeria within three years.

The divide between the haves and the have-nots among Nigerian banks is widening, a report by Bloomberg has indicated.

The country’s biggest lender by market capitalisation, Guaranty Trust Bank Plc, is so flush with cash it plans to repay its $400 million of bonds when they become due in November 2018 rather than issuing additional debt, while the Zenith Bank Plc and United Bank for Africa (UBA) Plc – the next largest banks by market capitalisation – sold international bonds for the first time since 2014.

At the other end of the scale, smaller lenders are scrapping plans to raise dollar loans and struggling to find investors to raise capital. Smaller banks are lagging behind as they battle rising levels of non-performing loans (NPLs) and capital buffers near regulatory minimums.

Do not expect this to stop. As fintech and technology erode further means of profitability, the Tier 2 banks could enter into major crises. This is a major asset-quality deterioration storm.

UBA, the third-biggest lender by market value, raised $500 million in its first Eurobond sale on June 1 at yields below initial guidance. This followed an equivalent issue a week earlier by Zenith Bank in a deal that was four times oversubscribed.

GTBank said this month it has no plans to sell Eurobonds because it’s setting aside funds to repay existing debt. By contrast, small- and mid-sized lenders like Wema Bank Plc dropped plans last month to raise dollar loans to rather sell naira debt locally in smaller tranches.

Unity Bank Plc, which missed a February 28 central bank deadline to recapitalise, has been in talks with investors since October, while Diamond Bank Plc started negotiations to sell businesses and issue debt over a year ago.

The central bank had to step in last year when it replaced the top management of Skye Bank Plc for breaching liquidity thresholds.

Ecobank Transnational Inc., based in Lome, Togo, plans to sell a $400 million, five-year convertible bond this month to refinance debt and provide short-term bridge funding for non-performing loans at its Nigerian unit.

Fidelity Bank Plc will decide in the third quarter whether to refinance $300 million of bonds due in May next year or issue new debt after seeing yields on the securities drop and strong demand from investors for Zenith and UBA’s notes, Chief Operations Officer Gbolahan Joshua said Tuesday. Access Bank Plc has $350 million of bonds due in July.

Local debt also comes at a price, with yields on five-year government bonds at 16.3 per cent. The Nigerian Stock Exchange Banking (NSE) Index has advanced 44 per cent this year, with UBA soaring 99 per cent to its highest since January 2014, while Access Bank has climbed more than 80 per cent to a four-year high.

Wema has gained less than 2 per cent and Skye Bank and Union Bank of Nigeria Plc are up about 10 per cent in 2017. Union Bank, in which former Barclays Plc Chief Executive Officer Bob Diamond’s Atlas Mara Ltd. owns 31 per cent, said in November it will sell as much as N50 billion in a rights issue scheduled to take place by the end of this quarter.

Sterling Bank, which announced plans to raise N65 billion in Tier 2 capital last July, managed to raise N7.9 billion in 2016 at 16.5 per cent, and is waiting for market conditions to improve before another issuance, according to Chief Financial Officer Abubakar Suleiman.

Without capital to back new business and write loans, small lenders risk falling further behind as Nigeria’s economy recovers from last year’s 1.6 per cent contraction.The International Monetary Fund (IMF) has forecast Nigeria will expand 0.8 per cent in 2017 as oil price improves.

But even with the disparity between Tier 1 and Tier 2 banks in the country widening, there were indications Tuesday that confidence in the Nigerian FX market has been restored, with the cumulative transactions on the Investors’ & Exporters’ (I&E) segment of the market rising to $2.2 billion, from about $1 billion last month.

Analysts believe that the increase in volume of transactions on the I&E segment is a positive sign of return of confidence in the financial markets as clearly demonstrated by the bull run on the stock market.

According to them, the investor sentiment has strengthened since the CBN introduced the I&E FX window, which they agreed has ensured greater flexibility in exchange rate determination.

The CBN on Monday injected $413.5 million into the interbank market in its unrelenting bid to guarantee liquidity in the market and shore up the value of the naira.

The naira remained stable at N363/$1 on the parallel market Tuesday.

Adapted from Bloomberg