Economic Confidential, April, 2009

FOCUS

Nigeria Becomes World’s Worst Market on Bank Losses

By Janice Kew and Michael Patterson

April 1 (Bloomberg) -- Nigeria’s stock market, Africa’s best performer during the past decade, posted the biggest declines worldwide in the first quarter as bad loans to speculators pushed bank valuations to an all-time low.

The Nigerian Stock Exchange All Share Index fell 37 percent this year, the steepest quarterly decline in more than a decade and the worst of 89 benchmark indexes tracked by Bloomberg. Stocks in Africa’s largest oil-producing nation reached a five- year low last week, even as a rebound in crude spurred gains in commodity-exporting countries from Russia and Norway to Brazil.

Investors have been fleeing “the good, the bad and the ugly” of the financial industry since Nigerian regulators allowed banks to delay booking losses on so-called margin loans backed by shares, emerging-markets brokerage Renaissance Capital says. The lack of disclosure left investors unable to identify potential losses. The All Share Index may fall another 9 percent, according to Moscow-based Renaissance and London-based Exotix Holding Ltd.

“Without meaningful disclosure investors will be hesitant to come back, especially in the financials,” said Christopher Hartland-Peel, an equity analyst at Exotix. “No one can really tell how the companies are faring.”

Lenders may be holding as much as $10 billion of toxic assets, equal to about half of their capital, according to Eurasia Group, the New York-based research firm that publishes the Global Political Risk Index with Citigroup Inc. Banks have provided at least 1 trillion naira ($6.8 billion) of margin loans to allow investors to buy shares, Bank of America Corp. said in a report last week.

Slowing Economy

Growth of Nigeria’s economy may slow to 1.5 percent this year because of lower revenue from oil, which accounts for 20 percent of gross domestic product, according to Standard & Poor’s. The naira weakened 20 percent against the dollar since Nov. 26, when the Central Bank of Nigeria began limiting the supply of foreign exchange to banks to protect foreign reserves. The bank’s naira rate was unchanged at 148.10 per dollar today, compared with 172 versus the dollar in unofficial street trading, according to Mohammed Kuza, a currency dealer in Lagos.

Renaissance expects the All Share Index to drop to 18,000 in the first half, from today’s closing level of 19,871.69. Exotix forecast the same drop, without giving a time frame.

No Bank Failures

The market has a daily turnover of between $10 million and $20 million and a total capitalization of $30.1 billion, according to Renaissance and UBA Capital, the brokerage unit of Lagos-based United Bank for Africa Plc. That compares with an average turnover of $30.2 billion a day this year on the New York Stock Exchange and a U.S. market capitalization of $9.38 trillion, Bloomberg data show.

Lenders make up about two-thirds of the Nigerian stock market, the largest proportion among the 50 equity indexes worldwide that are grouped in industries by Bloomberg and MSCI Inc. Banks accounted for four of the five worst performers this year among the 20 biggest Nigerian stocks by market value.

Wema Bank Plc, the lender whose chief executive was replaced by the central bank in September, dropped 67 percent, while Stanbic IBTC Plc, the Nigerian unit of Standard Bank Group Ltd., and Intercontinental Bank Plc, the country’s third-biggest lender by assets, lost 51 percent. Zenith Bank Plc, the fifth- largest, retreated 47 percent. African Petroleum Plc, Nigeria’s second-biggest fuel retailer by market value, was the worst performer with a 79 percent drop. All are based in Lagos.

Bank Reserves

Central bank Governor Chukwuma Soludo said Nigeria won’t allow any lenders to fail. Banks in distress may be given loans, have their management restructured or be forced to merge with another lender, he said in a speech in Lagos on March 30.

Nigeria’s lenders have among the biggest cushions against losses in the world, according to the central bank. Their average capital adequacy ratio, a measure of capital against risk-weighted assets, stands at about 22 percent, compared with 18.4 percent on average for financial companies in the S&P 500 Index, according to Bloomberg data.

Festus Odoko, a spokesman for the central bank, couldn’t be reached to comment.

UBA Capital says the retreat in stocks creates buying opportunities, including Nigerian Breweries Plc, the nation’s biggest beer maker by volume, and Lafarge WAPCO Plc, a unit of the world’s largest cement company. Nigerian Breweries lost 12 percent this year after falling 17 percent in 2008. Lafarge dropped 40 percent after a 68 percent slide last year.

Niger Delta

“It’s a time to be increasing exposure with a long-term horizon,” said Jonathan Harrison, the London-based global head of research at UBA.

Nigeria’s All Share index surged 454 percent from 1998 through last year, as investors poured money into lenders, brewers and construction companies to gain from an economy that grew at an average annual rate of 7.8 percent.

Stocks began falling a year ago as attacks by militants in the Niger River delta cut oil production. A 68 percent tumble in crude prices triggered by the global economic slowdown spurred more equity losses, prompting the stock exchange to temporarily restrict share-price declines to 1 percent a day in August.

Stocks dropped for 23 straight days after the Nigerian Central Bank said in October that lenders have the option to restructure margin loans until December 2009.

The six-month decline extended to 57 percent through yesterday, pushing prices for Nigeria’s biggest lenders to below their breakup value, at about 0.75 times net assets, down from a peak of 4.36 in February 2008, according to Exotix. That compares with a ratio of 1.3 for the MSCI Emerging Markets Financials Index, according to Bloomberg data.

“It’s a very opaque market,” said Francis Beddington, co- founder of London-based Insparo Asset Management, which oversees $140 million in Africa and the Middle East. “There are very good companies, but you don’t know what’s going on with the banks.”

Sources: Bloomberg Press