The Nation Newspaper

Tag: capitalisation

  • Insurance firms face hostile acquisition, mergers over low capitalisation

    More than two-thirds of insurance companies are valued below the minimum capital requirement to operate in the lowest rung of the proposed new insurance capital base, making most insurers susceptible to aggressive mergers and acquisitions.

    Current valuation of insurance companies obtained at the weekend by The Nation showed that some 70 per cent of insurance companies are valued below the N5 billion required to operate as a composite tier- 3 insurance company under the planned minimum capital requirements. Only 15 per cent of insurers meet the N15 billion requirement while 15 per cent meet the N5 billion for the second-tier composite operator.

    While regulators use the book value or shareholders’ fund as a measure of regulatory compliance, investment experts agreed that market value is a major component in any corporate valuation. Market value is usually ahead of book value because of the wealth creation potential and future value accretion of the book value. A reversal poses challenges in the event of capital raising and mergers and acquisition, according to investment pundits.

    Chief Operating Officer, GTI Capital, Mr Kehinde Hassan, said market valuation is one of the criteria for valuation of a company for any purpose of new share issuance or mergers and acquisitions.

    According to him, corporate finance experts use market value, net asset value or book value, peer group analysis and scenario analysis to reasonably ascertain possible valuation for a company. The financial ratios tend to revolve around a range and any value significantly outside the range is usually treated as an outlier and removed in the calculation of the pricing average.

    Hassan said low market valuation might have strong influence on the overall valuation of a company as strategic investors may only at best offer slight premium on market value of a company. In a hard-pressed situation, large investors may demand for market-based value or offer price around the pricing range.

    Managing Director, Sofunix Investment and Communications Limited, Mr. Sola Oni said low valuation is a possible trigger for aggressive mergers and acquisitions as low-capitalised companies may find it difficult to raise required capital in the event of massive capital raising exercise by many companies.

    According to him, market valuation, though not absolutely the exact determination of the value of a company in all cases, is a major indicator of the health of a company and over a period of time, the true reflection of its worth.

    “If a company is struggling to meet shareholders’ expectation, such a company is a target for acquisition. Strategic investors usually look for low valuations and synergies and for a company under pressure of minimum capital requirement, the market valuation may play a big role in the negotiation,” Oni said.

    He noted that one of the immediate expectations from the implementation of the new tier-based capital by the National Insurance Commission (NAICOM) is mergers and acquisitions, which may lead to historic consolidation of the insurance sector.

    Citing the example of the Nigerian banking industry, Oni said consolidation, though somewhat a bitter pill may be the much-needed tonic to boost investors and customers’ confidence in the sector, adding that capitalisation is a major requirement for global competitiveness.

    “Investors’ confidence in the insurance sector is low, so there is the need for a turnaround of the sector. Consolidation may lead to such turnaround. However, the current low valuations also present good opportunities for discerning investors who can see into the future, who know that Nigeria as a growing country cannot exist without a viable insurance sector, to take positions ahead of the repositioning of the sector,” Oni said.

    Most of the insurance companies are trading below their 50 kobo nominal value. Investment experts agreed that boards of insurance companies may find it difficult a decision to offer shares below nominal value.

    Under the new NAICOM’s tier-based minimum solvency capital policy, insurers will be classified into three tiers according to the minimum capital base and risk-bearing capacity. Tier 1 insurance companies are required to have minimum capital base of N9 billion for general insurance and N6 billion for life insurance, implying a composite capital base of N15 billion. Tier 2 companies are divided into two categories, with N4.5 billion minimum capital base for general insurance and N3 billion for life assurance. Thus a composite insurance-general and life insurance, will be required to have minimum capital base of N7.5 billion. Tier 3 companies will continue to operate on the existing minimum capital base of N3 billion for general insurance and N2 billion for life insurance, implying a composite capital base of N5 billion for a composite tier 3 insurance company.

    Under the risk-based capitalisation approach, tier 1 companies will be able to undertake all risks including annuity and high-level special risks such as energy and aviation risks. Tier 2 companies will undertake retail insurance as prescribed under Tier 1, including commercial and industrial risks and group life assurance while tier 3 companies will only be able to write retail insurance only including micro insurance, motor, fire, agriculture, compulsory liability insurances, individual life, health and miscellaneous insurance.

    The Nation recently reported exclusively that insurance companies have launched plans for emergency fund raising at the capital market as consolidation looms in Nigeria’s most populous quoted industry. There are 27 insurance companies quoted on the Nigerian Stock Exchange (NSE).

  • ‘Capitalisation to drive banks’ competition’

    Coronation Research, a part of Coronation Merchant Bank Group, has said the ability to support risk asset creation in the real sector will differentiate winners from losers in the Nigerian banking industry over the next three years. This is according to a report from one of the leading research houses in Nigeria.

    While the quality of asset in the industry is generally improving, the firm believes the best capitalised banks will move well ahead of their competitors. According to the Head of Research, Guy Czartoryski, “for two years, Nigerian banks have had an easy time, earning good income on risk-free government-backed, Naira-denominated securities. That era is drawing to a close as T-bill rates fall. Asset yields are trending south, and it is almost impossible to re-price liabilities to match. So, banks must either find other sources of income or face an average 15 per cent drop in their Profits Before Tax expectation for 2018. For the banks to replace the portion of income threatened by declining yields on securities, they must grow risk-weighted assets. This means a 6-12 per cent rise in customer loans in 2018.”

    The report categorises banks into three tiers; Group A, Group B and Group C. Banks in Group A, being the most well capitalized, have the biggest opportunity to increase consumer lending. According to the report, Group A includes Zenith Bank, GT Bank and Stanbic IBTC, which have the ability to significantly expand their loan books by 69 per cent, 82 per cent and 182 per cent respectively.

    Group B, including UBA, Access Bank and Fidelity Bank, have moderate capital levels and some ability to expand loans books but may also pursue tier II capital raise in the form of long-term subordinated debt. Group C, including FBNH, Diamond Bank and Sterling Bank, in the short to medium term have limited ability to expand their loans books and will most likely focus on dealing with capital issues and might attempt to raise long term capital from the capital market.

    According to Coronation Research, “if equity markets are sufficiently strong, some banks might attempt equity capital increases (Tier-I) this year. However, currently we have market valuations so low as to make equity capital dilute the interest of existing shareholders. So, the preferred capital-raising route is likely to be long-term subordinated debt (Tier-II). We expect market share in customer lending to flow from banks in Group C towards those in Group A. With banks in Group B we see some, but perhaps not significant, market share gains.”

    Leaving capital raising aside, 2018 presents a golden opportunity for the stronger banks to expand loan books and gain market share.  Nigerian banks are coming off a low base: lending (when adjusted for currency depreciation) has hardly grown over two years, but the economic conditions look good for renewed loan growth. Loan growth, over the last two years, has been far from impressive and understandably so, since banks have remained cautious as they have grappled with the effects of oil price volatility and its impacts on their loan books.

    Even though we believe the underlying pressure on loan assets is getting lighter, there is still IFRS 9 to contend with. We expect a one-off uptick in impairment charges this year, given that banks will start reporting using International Financial Reporting Standards (IFRS) 9 this quarter.

    With oil prices largely stable and our optimistic economic outlook for the year, we view the risk to banks’ oil portfolios as significantly reduced. Also, the stability in the foreign exchange market, coupled with renewed economic growth, significantly mitigates the risks associated with the trading and manufacturing sectors of the economy.

  • Moody’s, Augusto rate Heritage Bank high on capitalisation

    Moody’s, Augusto rate Heritage Bank high on capitalisation

    Moody’s and Augusto & Co., have affirmed that Heritage Bank’s capitalisation remains sound in relation to its low asset risk model and has capacity to generate income from its core business and settle its obligation as at when due.

    According to Moody, under the new methodology, the bank’s credit metrics’ ratings remain consistent with an a3 BCA when measured against Australia’s macro profile.

    A statement from Heritage Bank explained that this was part of efforts to furnish investors with objective analyses and independent assessments of its securities, bonds and credit assets. It is also meant to engage the services of Moody and Augusto & Co. to provide superior information on credit risk and other investment instruments.

    The bank said: “The international and local ratings investment metrics is a welcome development to the bank and, in light of this sterling achievement, we swiftly need to improve on our performances in order to boost our subsequent ratings.”

    According to the rating agency, the a3 BCA takes into account the bank’s low asset risk model that supports its very strong asset quality. Relative to its asset risk profile the bank maintains sound capitalisation. This is contained in Moody’s new bank methodology, which confirmed Heritage Bank’s long-term A3 issuer rating and affirmed its short-term issuer rating of Prime-2.

    “The bank’s baseline credit assessment (BCA), which encapsulates its stand-alone financial profile, and its adjusted BCA were also confirmed at a3. The outlook for all ratings is stable,” the agency stated.

    The new bank rating methodology includes a number of elements that Moody’s has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution.

    These new elements capture insights gained from the 2008-09 financial crisis and, the fundamental shift in the banking industry and its regulation. In light of the new bank rating methodology, Moody’s rating actions reflect the following considerations: (1) the “Very Strong” macro profile of Australia; and (2) the bank’s low asset risk model.

  • Nigerian capital market appreciates by 3.91 per cent

    Nigerian capital market appreciates by 3.91 per cent

    Activities at the Nigerian Stock Exchange (NSE) on Wednesday closed on an upward trend, reversing two-week consistent decline with the market indicators appreciating by 3.91 per cent.

    The News Agency of Nigeria (NAN) reports that the market capitalisation grew by N302 billion or 3.91 per cent to close at N8.025 trillion compared with N7.723 trillion recorded on Tuesday.

    Similarly, the All-Share Index which opened at 22,456.32 rose by 878.69 points or 3.91 per cent to close at 23,335.01 due to huge gains posted by some blue chip equities.

    Market analysts attributed the reversal to bargain hunters who were taking advantage of low price of equities to increase their stakes in the market.

    They said that stocks were getting very attractive with prices at ridiculously low level as some investors were using the opportunity to re-enter the market.

    They attributed the downturn to worries over falling oil price and the naira exchange rate.

    Nestle topped the gainers’ chart appreciating by N33.75 to close at N708.85 per share.

    Dangote Cement chalked up N5.38 to close at N128.89, while Lafarge Africa improved by N3.47 to close at N83.47 per share.

    Guinness garnered N3.03 to close at N96.03, while Nigerian Breweries inched N2.95 to close at N97.60 per share.

    Conversely, Seplat led the losers’ table with a loss of N7.98 to close at N151.74 per share.

    Ashaka Cement dipped N2.50 to close at N24, while Flour Mill dropped N1.50 to close at N16.35 per share.

    Further breakdown showed that Ikeja Hotel decreased by 29k to close at N2.81, while Honeywell shed 17k to close at N1.63 per share.

    The banking stocks drove activity at the exchange with FCMB Group emerging the most traded, exchanging 37.29 million shares valued at N37.68 million.

    UBA came second with a total of 36.17 million shares worth N106.78 million, while GT Bank sold 22.07 million shares valued N90.32 million.

    Access Bank traded 22.07 million shares worth N90.32 million and Unity Bank accounted for 15.56 million shares valued N90.32 million.

    NAN reports that investors staked N1.58 billion on 242.53 million shares traded in 3,865 deals against 256.44 million shares worth N1.97 billion exchanged in 4,731 deals on Tuesday.

  • SEC to review new minimum capitalisation requirements

    The Securities and Exchange Commission (SEC) has confirmed that it would review the new minimum capital base requirements for capital market operators.

    Acting director general, Securities and Exchange Commission (SEC), Mr. Mounir Gwarzo, said the apex capital market regulator would return to the recapitalisation issue in the next five months.

    Gwarzo told a team of the council and management of the Nigerian Stock Exchange (NSE) that visited him that the Commission was delighted that it has had a good collaboration with all stakeholders on the issue of the recapitalisation and it “will return to the exercise in the next five months”.

    The report confirmed earlier exclusive report by The Nation last week that the new management of SEC would review certain capital market policies and processes. SEC had also last week presented draft of new rules and regulations and amendments for public comment.

    Relying on an impeccable source, The Nation had reported that SEC may undertake extensive review of its policies and modus operandi with a view to aligning them with its core mission of investors’ protection and capital market development.

    The source had said the new management of SEC plans to review existing policies and frameworks for its operations to give a new verve to the operations of the apex capital market regulators.

    The erstwhile executive commissioner, operations, Securities and Exchange Commission (SEC), Mr. Mounir Gwarzo took over as the acting director general of the apex capital market regulator on Monday January 12. He succeeded Ms Arunma Oteh, who completed her five-year tenure on Wednesday January 7, 2015.

    It should be noted that SEC had extended the deadline for compliance with the new minimum capital requirements for various capital market functions from December 31, 2014 to September 30, 2015. Before the extension, some 262 capital market operators had met their various capital requirements.

    However, the larger segment of the capital market operators had called for a review of the minimum capital base, arguing that it violated the principles of risk-based approach that should govern the capitalisation of multi-operators market.

    SEC had 2013 announced major increases in minimum capital requirements for capital market functions under a new minimum capital structure that was initially scheduled to take off by January 1, 2015. Minimum capital base for broker/dealer was increased by 329 per cent from the existing N70 million to N300 million. Broker, which currently operates with capital base of N40 million, will now be required to have N200 million, representing an increase of 400 per cent. Minimum capital base for dealer increased by 233 per cent from N30 million to N100 million.

     

     

     

     

     

     

  • Market capitalisation dips by N2.7billion

    Market capitalisation dips by N2.7billion

    The negative trend of the NSE All Share Index was sustained yesterday as the local bourse shed 32bps to close at 40,444.39 points.  This pared the YTD and MTD performance of the Nigerian bourse to negative 2.1per cent and 1.9 per cent apiece.

    The decline was driven by profit taking within the banking basket — Zenith Bank (3.0%), GTBank (1.4 per cent), FBN (2.9 per cent), Stanbic (2.9 per cent) and UBA (2.6 per cent). Also, activity levels measured by volume and value traded declined 65.2 per cent and 55.8 per cent to 242.9m and N2.7bn.

    Most sector indices also closed in the red with the exception of the Industrial Index, appreciating 0.7 per cent on the back of Dangote Cement (0.9 per cent) and Lafarge Wapco (0.8 per cent). The Banking Index led the sector the declines, shedding 1.6 per cent – pressured by profit taking in Zenith Bank (3.0 per cent), UBA (2.6 per cent) and GTBank (1.4 per cent). The Insurance Index equally declined 0.3 per cent driven by price declines in International Energy Insurance (3.5 per cent) and N.E.M Insurance (1.3 per cent).  The Oil and Gas and Consumer Goods Indices both closed flat.

    The Market Breadth, as measured by the advancers/decliners ratio, closed weaker today at 0.5x with 18 gainers and 38 losers. Top gainers at the end of today’s trading session include Ikeja Hotel (9.9 per cent), Champions Breweries (4.9 per cent), AFRIPUD (2.2 per cent), while AG Leventis (9.5 per cent), UBCAP (4.7 per cent) and UAC-PROP (4.6 per cent), topped the losers chart.

     

  • Market capitalisation declines by N29b

    Market capitalisation declines by N29b

    The NSE All Share Index (ASI) shed18bps yesterday close at 41,135.56 points after three days of consecutive gains. Market capitalisation equally declined N29.0bnto close at N13.6tn.

    The decline in the market was attributable to profit taking in Nestle 3.7per cent , Dangote Cement 0.5 per cent, Guinness 5.0 per cent and PZ Cussons 5.0 per cent, even as market activity levels measured by aggregate volume and value traded also closed weaker at 674.0m and N6.3bn a 37.6 per cent and 21.8 per cent decline.

    Most sector indices within our coverage closed in the red with the exception of the Banking Index advancing 1.0 per cent due to the rally in Fidelity Bank 4.5 per cent Union Bank 3.0 per cent and Skye Bank 2.3 per cent. On the flip side, the NSE Consumer Goods Index shed 1.1 per cent amidst profit taking in Guinness 5.0 per cent, National Salt 4.0 per cent and Nestle 3.7 per cent.

    Similarly, the Oil and Gas Index retreated, shedding 0.7 per cent. Notably, the Index was pressured by the decline in Oando 0.9 per cent, Seplat 0.8 per cent and Eterna 0.5 per cent. The Insurance and Industrial Goods indices also both traded downwards —each shedding 70bps and 7bps respectively.

    The Market breadth closed marginally below the border line today at 0.9x advancers/decliners ratio: 32 gainers vs 33 losers.

    At the close of trading, Champions Breweries 10.1 per cent, Ikeja Hotel 9.6 per cent and Beta Glass 6.1 per cent topped the gainers list, while Guinness 5.0 per cent, PZ Cussons 5.0 per cent and Custody in 4.9 per cent topped the losers chart.

  • Market capitalisation gains by N26.9bn

    The nation’s capital market closed in the green yesterday as the Composite Index advanced 20bps to 40,729.49, bucking the MTD performance to negative 1.9 per cent. Similarly, market capitalization gained N26.9bn to N13.4tn. This gain was driven by the rally in bellwether counters – Dangote Cement (0.9 per cent), Lafarge (3.1 per cent), Nigerian Breweries (0.6 per cent) and Guaranty (0.6 per cent). However, trading activity measured by aggregate volume and value traded plunged 62.2 per cent and 33.5 per cent to 195.9m and 2.8bn respectively.

    Bargain hunting within the Industrial Goods Index was sustained for the third day, as the index gained 1.4 per cent to pace sector gains for the second straight day. This was on the back of gains in cement stocks – Lafarge (3.1 per cent) and Dangote Cement (1.0 per cent) and CCNN (0.9 per cent). Similarly, N.E.M Insurance (3.9 per cent) and Mutual Benefit (1.9 per cent) firmed up today, driving the Insurance Index higher by a marginal 0.2 per cent to halt a three day bear run.

    On the other hand, selloffs persisted in the Oil and Gas basket as the index shed 1.2 per cent – pressured by profit taking in Conoil (5.0 per cent) and Total Nigeria (2.7 per cent). The Banking Index also shed 0.5 per cent yesterday with Diamond Bank (3.7 per cent) and Union Bank (5.0 per cent) leading losses within the basket.

    Meanwhile market sentiment yesterday as measured by advancers/decliners ratio closed negative at 0.9x (29 stocks advanced against 30 declining stocks). Ikeja Hotel (9.8 per cent), Vono (5.0 per cent) and Premier Breweries (5.0 per cent) led the gainers list while top losers were UBN (5.2 per cent), Conoil (5.0 per cent) and RedStarex (5.0 per cent). The bargain hunting within the Industrial basket is broadly in line with expectation of stakeholders.

    However, with the market now technically trading marginally above the oversold region (NSE-RSI — 35.7), analysts anticipate bargain hunting activities will gradually reduce in sessions ahead.