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Low interest charges lure banks to offshore funding

By on May 29, 2014

Nigerian banks are raising tier-2 capital offshore due to low interest charges and their inability to raise funds in the domestic equity market, THISDAY checks have revealed.

In order to shore up their capital and have access to long-term funds, banks have been raising capital from the international market through bonds issuance and borrowing from development institutions offshore instead of accessing such funds in the domestic capital market.

Zenith Bank Plc recently sold its $500 million dollar-denominated bond in the at the international market. Diamond Bank also issued a $200 million five-year Eurobond.
Skye Bank Plc is currently concluding the raising of $150 million from the international market, while Union Bank is preparing to get approval   to raise $750 million offshore.

While the recovery recorded in the stock market in the last two years was expected to spur some capital raising activities in the domestic market, that has not happened. Banks still prefer  to go offshore to raise capital.

Speaking on this trend, a financial analyst with one of the international investment banking  firm,  said  the interest rates charged offshore makes the market more attractive than the domestic market.

“This trend we are witnessing among the banks now is not a surprise to me.  The interest rates  charged for borrowed funds is lower offshore. The charges range from five per cent to nine per cent compared to   between 12 per cent and 14 per cent that is charged in the domestic market,” the analyst said.

On why the banks have virtually dumped  raising fund through equity market, the analyst explained that most of the stocks are  trading below  their book value as a result they cannot  attract investors at  higher price.

“We have witnessed some significant recovery in the capital market in the past two years but the recovery is relative because the most of the banking stocks have not really gone close to their peak of 2008. Many of them, especially the tier-two banks are trading below book value at the present. No investor will buy such stocks at prices that are higher than book value,” he said.

While some of the banks have raised funds in the past, more are preparing the access the market offshore market for more funds.

The Managing Director/Chief Executive Officer, Citibank Nigeria Limited, Mr. Omar Hafeez last week  explained  the fund raising by banks is driven by the search for long-term funds to finance  power, oil and gas projects.

“Traditionally banks have short-term deposits. So, if they want to lend long-term, if they use their current stocks of dollar, then it is a mismatch because that is short-term dollars and long-term loans.

“So, they try to lengthen the amount of liquidity they have. The second reason is capital. They need tier-2 capital in order to support their balance sheet,” he added.

Hafeez described capital market as the deepest source of liquidity in the world, adding that another advantage of going to the capital market is that it helps financial institution to benchmark their rating.

“Remember, you can’t go to the international capital market without meeting very high standards of governance,” he said.

 

 

[This Day]