South African banks interested in growing their footprint in the Nigerian market.

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Nigeria now has fewer, but larger, banks with better corporate governance and regulatory oversight.

Despite rising diplomatic tensions between SA and Nigeria, and tit-for-tat expulsions of visitors, the two countries’ business links continue to expand, particularly in the financial services sector.

SA banks are especially interested in growing their footprint in the Nigerian market. This is despite the fact that in 2009 eight of Nigeria’s 24 banks had to be rescued after weak risk management and corporate governance lapses caused nonperforming loans (NPLs) to rise to more than a third of total loans. About US$17,2bn of NPL s was transferred and ring-fenced by the authorities to a specific asset management company.

Standard & Poor’s (S&P) states in a research report that reforms to the sector have yielded positive results .

Nigeria now has fewer, but larger, banks with better corporate governance and regulatory oversight. But S&P analyst Matthew Pirnie cautions that many questions remain about the real asset quality of Nigerian banks.

“The sector needs a longer positive regulatory track record before we would stop considering corporate governance and regulatory oversight to be among its key risks.”

The questionable asset quality at some banks has also been mentioned by Fitch in its latest ratings report on Nigerian banks. Fitch describes the credit quality of some banks as highly speculative. “Inefficient operations remain a characteristic of the market.”

This has not prevented SA banks from eyeing potential acquisitions in Nigeria Standard Bank, trading as Stanbic IBTC in Nigeria, is regarded as the only SA bank with a real presence in Nigeria .

Standard Bank CEO Jacko Maree says the bank is committed to Nigeria and the African market. “Of the 65 African branches commissioned in 2011, more than half were in Nigeria.”

The other local banks — Absa, FirstRand and Nedbank — have all been playing catch-up .

The three biggest banks in Nigeria — First Bank, Zenith and United Bank — are regarded as too big for a local takeover. A significant interest would also be prohibitively expensive.

That has placed the focus on the cheaper, mid tier banks, such as Access, Ecobank/Oceanic and Guaranty. Nedbank has a relationship with Ecobank after it extended the West African bank a loan of $285m for the integration with Oceanic. Nedbank has the option to obtain a 20% equity stake in Ecobank within three years.

Deutsche Securities says in a research note it is quite likely that Nedbank will exercise its rights in due course and acquire the 20% holding. Based on Ecobank’s 2010 earnings of $113m, a 20% shareholding would represent only 3% of Nedbank’s 2011 earnings.

However, Pirnie expects Nedbank to wait and see . He says that Ecobank still has a 40% NPL ratio and not much of a branch network. “At the same time, it could be a potentially good transaction for Nedbank,” he says.

FirstRand is another candidate for a Nigerian transaction after it walked away from acquiring Sterling Bank. However, it seems that FirstRand is in no hurry: CEO Sizwe Nxasana indicated at the recent interim results presentation that FirstRand would not take its eye off the SA market. Nevertheless, growing an African franchise was stated as a key growth strategy.

Standard Bank’s FICC research department says plans to expand into Africa will remain a relatively small part of FirstRand’s operations for now. “They will likely focus on local entry-level banking because margins are much higher.”

The speculation has been that FirstRand would rather develop its own greenfields operation in Nigeria. Though it would be more expensive, Pirnie says that FirstRand has enough capital to perform the task. “That will also depend on obtaining a licence.”

FirstRand and Absa are regarded as the best-capitalised local banks, with enough capital to expand into Africa, even after Basel 3 requirements are taken into account.

Absa is working through the Barclays Capital franchise on the continent and cannot disregard the Nigerian market. However, it has not provided much detail on its plans, besides confirming that it has opened a representative office.

It is probably looking at the cheaper banks in Nigeria, such as Diamond Bank or Skye.

“The sector needs a longer positive regulatory track record before we would stop considering ... regulatory oversight to be a key risk ”

— MATTHEW

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