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Nigerian banks need to rethink their cross-border subsidiaries 13 Mar 2017

Christine Lagarde, the Managing Director of the International Monetary Fund, recently told a gathering of African central bankers in Mauritius that the expansion of cross-border banking posed a threat to the continent’s financial stability. “Ten African banks now have a presence in at least 10 countries on the continent, and one is present in more than 30 countries,” she said. The IMF chief urged the bankers, therefore, to adopt enhanced oversight strategies to handle the challenges and potential vulnerabilities created by the cross-border expansion of the banks.
    
Lagarde’s recommendation is based on the understanding that during an economic crisis, cross-border banks could transmit contagion from their home countries to host countries and vice versa. This was the case during the last global financial crisis. When swathes of subprime mortgage-backed securities became worthless following the crash of the US housing market in 2007, the contagion spread around the world, transmitted by cross-border financial institutions – banks, insurance companies, hedge funds, etc. – from United States to countries in Europe, Asia, and across the major emerging markets.

Africa was largely shielded from the financial meltdown, until the recession that trailed it curtailed global demand for commodities, forcing the prices of oil and other African primary exports to fall. Given the expansion of cross-border banking in Africa, it is believed that the continent’s commodity exporters may also become susceptible to contagions and transmit same to sister countries. The recent slump in global commodity prices and the attendant crises of slower GDP growth rates and currency depreciations unleased in most African economies have only exacerbated those concerns.

Nigerian cross-border banks

The fillip for the cross-border expansion of Nigerian banks was the 2004 banking sector capital reform of Central Bank of Nigeria (CBN), which raised minimum capital requirements of banks from N2 billion to N25 billion. The 25 banks that emerged through the programme were said to be cash-awashed, having raised further billions of naira above the regulatory requirement. A number of the local banks then turned to cross-border banking to diversify their risk assets, access wider opportunities for maximizing profit, and enhance their brand recognition as regional or Pan-African banks.

By the end of 2008, over 10 Nigerian banks had launched subsidiaries in at least one other African country, compared to only two of such banks in 2002. The United Bank for Africa and Access Bank combined had subsidiaries in over 20 African countries at the end of 2016. Outside Africa, about nine banks had branches or representative offices in London, Paris, New York, Dublin, and Beijing, according to a paper written by Sarah Alade, the Deputy Governor (Economic Policy) at the CBN.

The rapid expansion of cross-border banking amongst Nigerian banks exposed the country’s financial system to threats from other countries. This created fresh oversight challenges for the CBN. The apex bank was faced with differences in financial infrastructure development, differing accounting and reporting standards, national secrecy laws and constraints on information flow amongst other issues. But CBN has been responding to these challenges. It has signed a number of joint-supervisory agreements with the central banks of a number of African countries.

The cross-border subsidiaries

The cross-border operations of Nigerian banks have come under renewed scrutiny, given the recent challenges faced by their parent lenders. Nigerian banks had relied on the country’s favourable macroeconomic environment to launch their cross-border operations across Sub-Saharan Africa. But in the past two years, Nigeria’s economic conditions have gone sour due to the collapse of global oil prices. This has led analysts to question the viability of the subsidiaries, since the parent banks have been grappling with rising non-performing loans and deteriorating capital ratios.

One of the main issues with the banks’ offshore subsidiaries is that most are loss-making businesses operating in countries with little financial sector development. According to Meristem Securities, offshore subsidiaries were a negative contributor to Nigerian banks’ after-tax profit in 2010 and 2011. Several banks recently divested from their cross-border operations in order to cut losses. Access Bank divested from its Cote d’Ivoire operations after it failed to stem losses at its Ivorian subsidiary. Keystone Bank, formerly Bank PHB, announced in 2014 that it would divest from its offshore subsidiaries in Liberia, Uganda, and Sierra Leone owing to losses arising from non-performing loans and high overhead costs.

Given the non-existence of robust capital markets in most Sub-Saharan African countries, Nigerian banks have been raising capital domestically and internationally to keep their African subsidiaries afloat. But this strategy has constituted a drain on the capital of parent banks even as offshore losses mounted.

In response, the CBN currently prohibits banks from recapitalizing their offshore subsidiaries with funds raised from foreign or local markets. One of the main factors that contributed to the failure of Oceanic Bank, which is now part of Ecobank, was the strain put on the bank by its expansion to seven African countries. Furthermore, Skye Bank, in an effort to boost its low capital ratios, announced last year that it would sell all its businesses in Gambia, Guinea, and Sierra Leone.

Even though Nigerian cross-border banks have struggled to sustain their offshore operations, the foreign cross-border banks operating in Africa’s largest economy have better fortunes. With a population of over 170 million and a huge unbanked population, Nigeria has been a goldmine for banks headquartered in other African countries, as well as the global banks. A case in point is Ecobank, which is based in Lome, Togo, with operations in over 30 African countries, including Nigeria. Ecobank’s Nigerian subsidiary has grown to become the largest and single most profitable part of the bank’s businesses on the continent. Ecobank Nigeria has over 600 branches and nearly N2 trillion in assets. The bank is one of the eight Nigerian banks designated as “systemically important banks” by the CBN.

Apart from Ecobank, Stanbic IBTC – the Nigerian subsidiary of Standard Bank of South Africa, Africa’s largest bank by assets – is also another example of a successful foreign-owned bank operating in the country. Stanbic IBTC is the largest contributor to Standard Bank’s group earnings and profit outside South Africa.

Less is more

It is noteworthy that following the banking consolidation in 2004, Nigerian banks chose to channel a significant portion of their liquidity surfeit to the expansion of cross-border operations across Sub-Saharan Africa. This suggests that the banks considered the Nigerian economy to be limited in terms of investing their capital and maximizing profit. This is true to the extent that the banks concentrated on a narrow pipeline of trade finance, in which petroleum product importation was dominant. Risk appetites for SMEs, agriculture, technology, manufacturing and healthcare financing were weak among the local banks. A number of factors – including high cost of raising financing, absence of credit information infrastructure and poorly organized businesses fostered the vicious cycle in which the banks avoided financing for these growth sectors which continued to lock up investment opportunities.

Cross-border expansion of Nigerian banks has brought several benefits to the financial systems of their host countries. Alade notes that recipient banking systems have benefited from improved technology, greater competition, increased financial intermediation, and strengthening of the regulatory and supervision framework. But Nigerian banks have not significantly benefited from their presence in other countries beyond prestige and branding. Given this situation, it behooves Nigerian banks to reconsider their cross-border strategies in order for their expansion to benefit not just investors but also the country’s economy.

Nigerian banks could take a cue from Barclays, the British banking giant, which is scaling down its African operations in other to boost its capital ratios and focus on its core markets in the United Kingdom and the United States. In the aftermath of the global financial crisis and the increasing penetration of financial technology (fintech) companies, Nigerian banks should learn that less is more.