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Banks’ rights issues elicit confidence in equity market

By on October 6, 2014

Gradually, but steadily, the frenzy for capital raising has begun in banks at a period when investors are regaining their confidence in equity market. For example, Access Bank Plc, like some other banks mindful of the rising confidence of the Nigerian shareholders in the banking sector, has decided to table its plan for a rights issue at the extra-ordinary general meeting of the bank on October 13, reports Festus Akanbi
For existing shareholders of money deposit banks, it is time for action. This is because the lull which had been associated with the nation’s equity market has begun to give way with a number of banks seeking greater participation of their existing shareholders in their quest to generate more funds for their respective institutions.

For some few years, banks have been wary of embarking on fund raising through capital market because of the obvious low appetite for shares. The recent crisis in the market and the low purchasing power of potential investors, according to a shareholder activist and Coordinator, National Shareholders Solidarity Association of Nigeria, Sir Sunny Nwosu, have combined to bring a lull into the market.
“The market is just recovering and confidence is being built. There are lots of people who will still be waiting and watching the market. It will take a lot of persuasions to convince them to come back to the market,” the shareholder s coordinator said.

However, a number of banks have had cause to raise additional funds, preferring to restrict themselves to the existing shareholders through a rights issue option.

Right issues refer to an issue of rights to a company’s existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holdings, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased in general at a discount to the current market price. Rights are often transferable, allowing the holder to sell them on the open market.

Access  Bank’s Rights Issue
Access Bank Plc will on Monday, October 13, 2014 hold an Extraordinary General Meeting to approve its planned Rights Issue on the basis of one ordinary share for every three fully paid ordinary shares held by shareholders of the bank at a price of N8.90 per share.
Other information provided by the bank about the offer include; Offer size of 7,640,449,438 ordinary shares of 50 kobo each.

The funds raised will be used to upgrade the bank’s information technology platforms and branch network to enable it provide better service and further improve the working environment as well as improve its distribution channel infrastructure to enable it provide more efficient services to clients. The funds will also be used to augment the bank’s working capital and support risk assets growth.

Group Deputy Managing Director of the bank, Mr. Obinna Nwosu, at a recent media parley in Lagos, said Access Bank boasts of a Capital Adequacy Ratio of 21 per cent; seven subsidiaries, 3,192 professional staff; 366 branches, 1,042 Automated Teller Machines and 11,846 Point of Sales channels.

The bank is listed on the Nigerian Stock Exchange and the London Stock Exchange (Eurobond).
According to him, the bank’s corporate history is underlined by disciplined capital planning. He explained that with a vision of becoming one of the most respected banks in Africa, Access Bank has grown to be a top five bank in Nigeria.
Between 2002 –2007 Access ranked among top 10 banks. The bank, which is dominant in trade finance, is also categorised among the top three foreign exchange and money market banks.

Between 2007–2012, it ranked among top five financial services group.
The current target is to position the bank as the world’s most respected African bank within a time frame covering 2013 –2017.
Access Bank is also set to achieve ranking among the top three positions by all financial metrics and become a reference point for technology.

Obinna said Access Bank was also determined to become the leading project and structured finance bank and best treasury and financial market bank in the country.

Investing in Access Bank
Access Bank is today a Tier 1 bank with robust financial indicators apart from its enlarged resource base with strong upside potentials.
Obinna said the bank boasts of a credible leadership with a clear focus on value creation for shareholders.

“Access Bank is fully embedded as a Nigerian Tier 1 Bank and completed our transition to a large diversified financial institution.
“Enhancement of Tier 1capital is imperative to enable us exploit the market opportunities and achieve our vision whilst delivering superior shareholders value,” Obinna explained.

He said the bank was poised for building and leveraging on resources and benefits of being a large diversified financial institution, saying Access Bank is resolute to achieving the objective of becoming the world’s most respected African Bank.

Capital market analysts said Access Bank had been able to generate strong returns for investors in the bank’s shares in form of capital appreciation consistent dividend payout. The bank also boasts of an attractive market price trading at a 0.9x discount to book value.
Existing shareholders in the bank will also like to explore the window of opportunity in rapidly expanding and consolidating banking sector at the backdrop of a stable economy.

Access Bank, which stands out among the actively traded stock with a robust shareholder base, has also demonstrated capacity in integrating and extracting value from acquisitions.

Unity Bank
Similarly, another bank, Unity Bank Plc recently raised N19.23 billion ($117.4 million) in a share sale to existing shareholders to bolster its capital position as the central bank implements stricter international regulations.
The mid-tier lender sold 38.45 billion shares at 50 kobo each. The issue was oversubscribed and the bank is expected to refund excess subscription monies to shareholders.

Unity Bank raised the funds to bolster its capital base and finance working capital, the adviser to the rights issue said in a notice to Reuters recently.

The CBN has asked lenders to convert to stricter international capital requirements, meaning that several of them would have to raise funds this year as the new rules would see capital levels drop by 100-400 basis points to near the regulatory minimum of 16 per cent, analysts have said.

Diamond Bank’s Right  Issue
Another bank, Diamond Bank, which has just concluded a N50.3 billion rights issue, issued a $200 million Eurobond in May.
Asked to comment on the recent rights issue of the bank, its managing director, Mr. Alex Otti, said “I might not be able to give numbers as per revenue impact because you know what we are talking about is Tier I equity, so it is not like subordinated capital that has a tenor. The rights issue goes into tier-1 capital. The most important impact that we expect that it would make on the bank is to increase our capital adequacy ratio (CAR), which has been hovering around 17 per cent to anywhere above 20 per cent. Today, we are one of the eight systemically important banks (SIBs) as categorised by the Central Bank of Nigeria and the implementation of the Basel II and III Accords from October would require that banks like ours that are not just international, requiring a minimum of 15 per cent CAR, but also an SIB, with an additional 100 basis points headroom, meaning a minimum CAR of 16 per cent.

“We would have to work very hard to maintain those limits if we would remain an SIB. That is one of the major impacts. The other one is to make funds available for trade and business. The numbers are not yet out, but the indications we are getting from the parties to the offer is that the rights issue was fully 100 per cent subscribed, which is also a vote of confidence on the board and management of the bank.”
He described the impressive support of the bank’s shareholders, which he called a feat in times like this.

He said, “These days when the market is still wobbly, so it is a feat to go into the market and you see everything that you put out in the market being mopped up by existing shareholders.”

The bank, according to him, will use part of the proceeds of the fund generated to boost its branch expansion strategy.
Otti said, “In terms of the question on branch expansion, we would continue to expand. We believe that a number around 300 in terms of footprint would be somewhere about the optimum number. As we go into 2016, we would probably be looking at a number of about 350. As at the last count, we had 264 at the end of August and I believe that we would be able to add nothing less than another 36 branches before the end of the year to take us to the ideal number of 300.

Nigerian banks raised a total of about N340billion ($2.1billion) between January and August this year, similar to the entire amount raised in 2013, a new banking sector report stated.

The Report
A recent report by FBN Capital Limited had predicted that more banks are likely to raise capital in 2015 as a result of the Central Bank of Nigeria’s (CBN’s) new capital requirement rules, which are likely to come into effect before the end of the year.

Basel II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BSBS).

The CBN earlier this year released a guideline on Nigerian banks’ transition to Basel II/III and gave a six-month period to June 2014 during which the banks were to compute compliant Capital Adequacy Ratios (CARs). Given the observed implications of the changes on banks’ capital levels, banks’ feedback and other observed challenges with the guidelines, the CBN extended the parallel run to September 2014, and has provided clarifications on some areas. Thus, when the banks release FY14 results, they will be reporting Basel II/III-compliant ratios for the first time.

However, as the deadline approaches, there are indications that the major preoccupation of banks is how to reach the new threshold by raising additional capital.

 

[This Day]