Operators View Changes With Cautious Optimism

The operators on the Nigerian Stock Exchange are at the forefront of activity in the capital markets. They are also very numerous, with licensed broker dealers alone numbering some 250. While they face pressures to raise capital, it appears that some might miss the boat and this is likely to reduce the cohort over the coming period, they nevertheless remain extremely influential catalysts of change.

Many operators have seen dramatic changes, but few have seen as many as one of the country’s most influential and longest-serving market analysts, Bismarck Rewane, managing director of the Financial Derivatives Company.

The building of a corporate and financial sector has further grown in leaps and bounds even though the operators’ main concerns are that not more companies are quoted on the stock exchange. But they speak warmly of growing transparency, more technologically automated processes and greater enthusiasm from smaller shareholders – at least until the last crash. Ike Chioke, managing director of Afrinvest, says that “you see in the last 50 years the way forward for the next 50. Nigeria is on a fast track to economic and capital market development”.

Institutional as well as market change is the key building block for Yewande Sadiku, head of investment banking at Stanbic IBTC. She says, “We have seen institutions built, we have seen capital raised, and companies become more transparent. Those which are publicly listed have become more efficient or more successful, more sustainable than those which are privately held. So there are benefits and clear advantages derived by society because of this development.

“Capital markets are a source of capital. They produce a good return for savings. It has led to public accountability and transparency. It has created jobs and brought international funds into the market which would not otherwise have come. So on balance it is a great thing.” The institutions Ms Sadiku is referring to include the Securities and Exchange Commission, the Nigerian Stock Exchange and the Central Bank of Nigeria.

That said, change is moving in complex and sometimes disorientating patterns, says Rewane. “Credit intermediation is growing. And the shift from an informal to a formal economy is growing. But they are all growing at different paces. It is evolutionary because it is a slow change.

“Now, recently, there was a revolutionary catalyst, like banking consolidation; so people saw a great opportunity. It has accelerated this rate of change. We saw this spike. Obviously with that came certain consequences, some of them not so pleasant in terms of the correction and some contradictions in the trend. We are trying to recover and people are trying to make sense of all of these changes, some of them good, some of them not so good. We are at that phase now.”

He says that only $50bn of the country’s total income of $325bn is saved, a rate far lower than in more developed markets (like Japan) which notch up savings ratios of between 60% and 70%. He adds that these numbers may be misleading. “The fact that money is in the banking system does not mean that it is saved. It could be that someone has N100,000 in the bank, but they are also borrowing N200,000; so this is not a saver –this is a dis-saver!” The low level of savings and intermediation is explained by the presence of credit schemes outside the banking system, he says.

Fingers burnt

While the institutions have grown and the markets developed products and trading techniques, operators and regulators bemoan the absence of small investors. This is partly explained by the stock market crash of 2008, which is still very fresh in people’s minds.

One operator observed, ‘‘New investors with some money to invest have the option to buy a life policy, to save with a savings account, to put the money in a bank fixed deposit account, or to buy stocks in the equity market. He may well say, ‘Oh yes, my mother bought stocks in the equity market 10 years ago and she hasn’t recovered – so why should I do that?’ He is not even going to look at it! All he knows is that everything we had is gone because of this stock market thing. So the feeling amongst a lot of young people is: ‘I am not interested, don’t even talk about it’.”

Institutions, in particular the SEC, the NSE and the Ministry of Finance, have an uphill task restoring faith in the markets and bringing back in people whose fingers have now been so badly burnt. The increasing role and dynamism of institutional investors and traders in Nigeria’s capital markets will help with that. Changes in the law governing pension and insurance funds are enabling their managers to participate in local stock and equity markets, says Bolaji Balogun, managing partner at Chapel Hill Advisory Services.

“The institutionalisation of the buy side in the market place is growing apace. This started with the passing of pensions legislation in 2004, which required every business with more than five employees to fund their pensions and make formal pension arrangements. We now have a very strong pensions industry, with nearly $13bn of assets under management (AUM).

“It is estimated that the AUM will grow, on average by $5bn a year. Potentially about two million Nigerians will be added to the pension coverage gap every year.”

Institutional money now dominates the local exchange, and the managers of this money have become very powerful players in the Lagos capital markets. Balogun also notes the growing presence of foreign institutional funds in the Lagos exchange. This includes the US-based funds Ashmore Emerging Market Managers and SQM Frontier Management. “Since 2008, you have seen a complete shift; markets are now dominated by domestic institutional, mostly pension funds, and by international institutional, mostly Africa-focused emerging or frontier type investment funds.’

Nigerian capital markets have been overshadowed by question marks about the stability and management of the banks, especially in the wake of the financial crash. Many were found to be buying their own shares using their own securities houses as intermediaries and when those shares crashed, many banks suffered from them. This prompted a tougher banking regime and a wave of mergers.

Market operators are encouraged by the tough stance of the Central Bank Governor, Sanusi Lamido Sanusi. His demands for recapitalisation have boosted the banking system, says Balogun. “Banks are required to have capital ratios of 10%, 2% higher than in Europe,” he says. “But most banks now set internal targets slightly north of 15% – thus 15%, 16%, 17% – so whenever their capital gets close to that level it is a trigger to raise tier one or tier two capital.

“I expect that from the second half of 2012, we will see a fair amount of capital raising activity. You will see some loan growth between now and then and once that happens, the capital adequacy levels will come down. But they are still sufficiently well capitalised, with CARs in some instances reaching 30%. In this environment it is necessary to be safe.”

Another round of fund raising for banks

Banks will have to raise further capital when Nigeria signs up to Basel III, which incorporates regulation that followed the global financial crisis. This will mark a dramatic shift, Balogun says. “I would imagine that sooner rather than later they will begin to think about the much stiffer capital requirements around Basel III. Fundamentally, the regulator here has always looked at capital adequacy on the tier one basis. If you do have tier II, it counts up to 50% of your tier one, but no more. Most of the banks we are talking about have tier one capital adequate north of 15% – so it is a fair amount of capital.”

The stabilisation of the capital markets has the potential to fund an expansion of the economy, says Bismarck Rewane. “Once people see that there is some consistency, there will be that quantum leap. The critical mass itself becomes the base for another level of change. So it will be very transformational. It will have an effect on so many things in both the public and private sector. Private sector companies who are publicly quoted, accountable and well governed will outperform opaque counterparts. The government itself will be definitely more accountable, and by implication more efficient.”

Chioke confirms this. He expects the government to seek to actively raise money on the capital markets with bond issues. “To raise the bond you have to tell the investors what you are going to use the money for. You have to produce a cash flow. Without that you won’t be able to raise any more money.”

Operators on the markets expect pressures to grow for greater accountability and transparency, both in the public as well as private sectors. “Governments will be accountable this time to the creditors, which will be good in building trust in the markets.”