A financial sector in revival on back reforms
The key players behind reforms leading to Nigeria’s capital market rebound .
About five years after it slumped by the biggest margin ever, the Nigerian capital market has not only recovered but has also returned to the path of growth, driven by smarter regulation, reforms and rising investor confidence.
The reforms initiated by the current regime of President Goodluck Jonathan has aided the rebound in the market, as the regulators—the Nigerian Stock Exchange (NSE), the Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN) and the Ministry of Finance (MOF)—have all strengthened their tool-boxes, by changing the rules of engagement, and insisting on stricter compliance by players.
Two major indicators of this rebound in the stock market are the All Share Index (ASI) which has risen 60 percent in the past year and closed at 33,352.96 on 17 April 2013 from 20,788.83 at the same period in 2012 and Market Capitalisation which has increased to N10.6 trillion from N6.63 trillion in the same date last year, an increase of 60.8 percent.
The equities market which dipped in 2008 and 2009, losing a total of 80 percent, as the global financial crisis spread, however rose by 37 percent in 2012, and has risen 18 percent year to date.
BusinessDay’s analysis looks at the key players behind this rebound in the equities markets and pinpoints the various actions they took which have led to a renewal of investor confidence in Nigerian equities.
Arunma Oteh, Director General of Securities and Exchange Commission (SEC)
Arunma is the director general of the Securities and Exchange Commission (SEC), Nigeria, and the highest ranked capital markets official in the country.
In 2012, the Nigerian capital market recorded a 37 percent growth in stock market capitalisation, and 44 percent increase in total market capitalisation, setting the record for the biggest recorded growth since the 2008/2009 market downturn.
Oteh as the head of the capital market regulator, SEC, has had a strong role to play in the market rebound by showing commitment to building a world class market that is transparent and inclusive even in the face of tremendous odds.
The SEC under Oteh has insisted on tighter corporate governance by companies as a means of enhancing shareholder value and investor protection.
In order to improve corporate governance, the SEC inaugurated a National Committee, chaired by M. B. Mahmoud, for the review of the 2003 Code of Corporate Governance for public companies in Nigeria, to address its weaknesses and improve the mechanism for its enforceability.
The SEC also embarked on a launch of capital market club as a means of catching investors young.
The Commission has recently approved the registration of two new trading platforms, FMDQ OTC plc and NASD to provide OTC trading services.
The Commission also gave a deadline of December 31, 2012, for all share certificates to be dematerialised.
Oteh’s intervention in the Nigerian capital market has inspired accountability, transparency and deepened public confidence in the sustained and ongoing financial market reforms.
The SEC has also championed the cause of reducing the cost of transactions on the NSE to boost trade volumes, encourage new public listings and strengthen liquidity.
The diligent work being done by the Director General of the Securities and Exchange Commission (SEC) Nigeria and her team to transform the Nigerian capital market into a world class market through implementation of a far-reaching reform agenda, has received international accolades.
Oteh was pronounced winner of the ‘Award for Distinction in Public Service’ by the African Business Awards 2011 Committee.
The award signals international endorsement of the ongoing reform of the Nigerian capital market. It also indicates a gradual return of confidence in the market within discerning and crucial international circles.
Goodluck Jonathan, Nigerian President
The Nigerian President has played a major role in the revamp of the financial sector by providing the political cover necessary for the regulators to do their job effectively.
But beyond that, by maintaining a technocratic reform team in the key areas of the financial services sector, the President has sent a strong message to financial markets about his commitment to reforms.
It was under the President that legislation allowing Nigeria to establish a Sovereign Wealth Fund (SWF) was passed, a milestone of sorts in the history of the country.
Some of the policy initiatives of the current administration have been positive for the expansion of Nigerian companies leading many to restructure, including those that have diversified their operations to take advantage of emerging opportunities,
Flour Mills of Nigeria plc, for instance has branched into cassava cultivation by acquiring Thai Farms Limited, to secure high quality cassava flour.
Such moves are improving their earnings potentials.
Investments to revamp previously decrepit infrastructure like the Lagos-Kano rail line has helped food and cement companies to move their goods cheaper and more efficiently, which translates directly into a higher bottom-line.
The sale of majority stakes in power plants and power distribution companies spun out of the former state-owned utility (PHCN), is also leading to opportunities for Nigerian Banks to expand their loan books and create risk assets which feeds profitability.
Ngozi Okonjo – Iweala, Minister of Finance
Ngozi-Okonjo Iweala, the finance minister and co-ordinating minister for the Economy, has championed reforms that have aided Nigeria’s relative macroeconomic stability, which is a necessary condition before long-term funds can be attracted to Nigeria’s economy.
From fiscal consolidation attempts at the federal level to efforts to plug the leakages in Government revenue through bio-metrics, Okonjo – Iweala’s presence in Government has been a driver of investor confidence in the nation’s financial system.
The finance minister initiated port reforms, which have helped to cut down on the number of agencies in the nation’s seaports and easing bottlenecks for Nigerian companies doing business at the ports.
The Finance Ministry is also a backer of the Asset Management Corporation of Nigeria (AMCON), which bought the bad debts of banks, cleaning up their books and giving them a fresh impetus to resume lending.
There have been market friendly policies, such as the elimination of certain taxes on transactions on the exchange as well as the announcement of a forbearance package for indebted stock brokers, which has aided in the turnaround of the market.
Her dogged fight for the accumulation of excess oil earnings has led to the appropriation of an initial $1 billion for the nations Sovereign Wealth Fund (SWF).
The Finance ministry under her has worked in close concert with the Central Bank of Nigeria, to co-ordinate fiscal and monetary policy, with the ultimate goal of price stability.
The size of the Nigerian economy under her has increased to become the second largest in Africa as nominal gross domestic product (GDP) rose to $273bn at year end 2012 from $169bn in 2009.
Growth averaged 7.2 percent per year for the period according to International Monetary Fund (IMF) estimates.
Nigeria’s low level of external debt, calculated at $6.5bn, and overall debt-to-GDP ratio of just 17 percent adds to the positive macroeconomic ratios.
Foreign Direct Investment (FDI), in 2011 stood at $8.9 billion, which was the largest in Africa.
Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria (CBN)
Sanusi Lamido Sanusi in 2009 took the helms as the Governor of the Central Bank of Nigeria, at a period in which the global financial crisis was having an indirect impact on the Nigerian economy.
This led to reduced capital inflows into the economy and a collapse of prices within the stock market.
There was significant exposure of banks to the capital market in form of margin loans and a withdrawal of liquidity from local subsidiaries of foreign banks.
The macro-economic impact of the crises took the form of the depletion of external reserves and an increase in the volatility of the naira versus the dollar as well as a significant decline in oil revenues leading to revenue attrition for all tiers of government.
The inability of the local banks to effectively manage the sudden increase in capital inflows arising from high oil price preceding the crisis, meant that most of the capital raised in the 2004 -2008 period was poorly deployed as loans to the over-concentrated sectors of oil and gas, margin lending, and real estate investments.
When the business cycle turned, the total industry non-performing loans hit an industry high of over 30 percent (2010); meanwhile because banking stocks as a whole made up as much as 60 percent of the capitalisation of the Nigerian Stock Exchange (NSE) in 2008, as financial stocks crashed the whole market went down with it.
Sanusi took bold but necessary steps to restore confidence and stop the bleeding in the banking sector.
Sanusi fired the chief executives of eight lenders within four months of taking office after an audit found evidence of mismanagement and reckless lending. He pushed for the revocation of the universal banking model and instead instituted a holding company model in which customer deposits are ring-fenced from proprietary trading or other non-core banking activities.
The CBN also tightened regulation with regards corporate governance in banks, limiting the tenure of Bank CEOs to 10 years and supported the creation of the ‘bad bank’ Asset Management Corporation of Nigeria, AMCON, which bought toxic assets from banks and helped to clean up their balance sheets.
Sanusi also tackled the macroeconomic stress points in the economy by pushing for stability in the currency and helping to bring inflation down below 10 percent.
The CBN hiked its benchmark interest rate by 5.75 percent in 2011 to a record 12 percent and has kept it unchanged since then, helping to attract capital inflows seeking to buy high yielding naira denominated securities. The regulator also drew heavily on dollar reserves to defend the currency and avoid naira depreciation.
The reserves which finished flat in 2011 despite elevated oil prices were up 35 percent in 2012 to $44.6 billion. The regulator increased reserve requirements for banks to 12 percent of assets from 8 percent and limited access to twice-a-week foreign exchange auctions to stop dealers from buying foreign currency using naira purchased from CBN at a discount.
Sanusi in 2011 also set aside the minimum one year hold period for government bonds by foreign investors, culminating in the October 1, 2012 addition of Nigerian bonds to JP Morgan’s emerging market index (GBI-EM) -and an estimated $1.5 billion of inflows- as well as the April 2013 inclusion of Nigerian bonds in the Barclays bond index.
Mustafa Chike–Obi, CEO Asset Management Corporation of Nigeria (AMCON)
The Asset Management Corporation of Nigeria is a unique African and indeed global institution that combines the buying of bank non-performing loans (NPLs), with the restructuring or refinancing of performing loan and the recapitalisation of troubled financial institutions.
AMCON, as the government owned ‘bad bank’ is known was set up in 2010 as a resolution mechanism for the Nigerian banking crises.
Data from AMCON shows that it spent N5.6 trillion ($35.5 billion) in 2011 to acquire non-performing loans giving banks more capacity to lend to the private sector.
The intervention by AMCON has helped to reduce the banking industry NPL ratios to an industry average of about 5 percent from over 30 percent in 2010.
AMCON sold bonds to fund the purchase of bad debt and took over three of the rescued banks after regulators deemed them unlikely to meet a recapitalisation deadline.
Earnings are increasing at Nigerian banks as a result, leading to a recovery in their share prices.
Zenith Bank, Nigeria’s third largest lender by market value, reported this month that net income for full-year 2012 rose to N100.68 billion ($636m) from N48.7 billion a year earlier, the highest ever for any Nigerian Bank.
The stock is up 56 percent in the past year.
AMCON was recently talking to debt investors on a non-deal road show in London, as it looks to float debt to refinance a N5 trillion ($31 billion) debt.
AMCON, reported a one-off N2.37 trillion naira loss for the 2011 period at the end of last year.
The key priorities to AMCON now are the liquidation of holding in the nationalised banks and the recovery and restructuring of acquired banks’ assets, according to the CEO Mustafa Chike-Obi.
Oscar Onyema, CEO Nigerian Stock Exchange (NSE)
Oscar Onyema, the current MD/CEO of the Nigerian Stock Exchange, took over the running of the Exchange at a time in 2010 when investor confidence was at its lowest ebb in a decade and the credibility of the institution itself was at stake.
The Exchange under Onyema began a reform process that included targeted business development efforts; a comprehensive and robust legal and regulatory framework; efficient technology system for the exchange; developing a market structure that would drive liquidity and depth; and a greater emphasis investor/issuer protection.
The NSE has also launched new initiatives such as the market making programme, the extension of the trading band for stocks from 5 percent to 10 percent, the extension of trading period on the NSE, the introduction of Exchange Traded Funds (ETF), and retail bond trading to diversify the offerings on the exchange.
The exchange has also signed an agreement with NASDAQ to provide a new trading platform.
The efforts are paying off as retail sentiment at the Nigerian Stock Exchange (NSE) has turned from bearish to bullish.
The share of trading activity by domestic retail investors in the NSE has moved up to 45 percent from 30 percent at the end of 2012, with foreign investors now controlling 55 percent of the market as opposed to 70 percent according to the most recent data from the NSE.
The average value of shares traded daily has also jumped by 64.7 percent, to $28 million today, from $17 million last year, according to Onyema.
The NSE All Share Index has gained 18 percent year to date, while the market capitalisation of all listed securities on the exchange stood at $101.64bn, with equities making up $56.77bn and fixed income securities making up $34.8 billion.
The bourse has a goal of getting to a $1 trillion market capitalisation by 2016, through favourable government policies, such as the passage of the PIB, which would unbundle the NNPC, and oil majors and get them listed on the exchange.
The NSE today is equivalent to 21 percent of GDP, meaning that key sectors of the economy such as Agriculture, telecoms, oil and gas, and utilities are not represented on the bourse.
The NSE forecasts that the Agriculture sector can garner a market capitalisation of $140 billion, telecoms; $45 billion, oil and gas; $265 billion and utilities $16 billion, if the companies in the sector are to list on the Exchange by 2016, helping to meet the $1 trillion market capitalisation goal.
The Nigerian bourse which currently has 195 listed companies is identified as the third largest Exchange in Africa by market capitalisation.
The NSE currently has 14 electronic trading floors across Nigeria and there are 312 broker-dealer firms and 28 issuing houses operating in the market.
According to Onyema, there are about 1,000 companies that the NSE is prospecting to list on the Exchange.
The reforms undertaken by the NSE management under Onyema, has led to a spike in interest by international and local investors in the NSE.
A new Nigeria country ETF, mulled since 2009 just listed on the New York Stock Exchange (Ticker: NGE) and provides an easy way for US and global investors to invest in Africa’s second largest and fast growing economy.
PATRICK ATUANYA