Banks with foreign subsidiaries have been advised to utilise resources in their host-countries to boost their operations rather than ship funds from home to do so.
In a statement, the Central Bank of Nigeria (CBN) urged them to raise funds from the offshore capital market through private placements or public offerings.
CBN’s advice followed its earlier directive stopping banks from using local resources to fund their offshore subsidiaries. It also stopped quarantee of deposits for foreign subsidiaries.
CBN Director, Banking Supervisions, Agnes Martins advised that the banks could also pursue a merger or acquisition; or if external capital raisings fail, submit a strategy for exiting the relevant foreign jurisdictions to the regulator.
The directive also bars Nigerian banks from guaranteeing the deposits of their foreign subsidiaries and mandates banks with foreign subsidiaries to submit plans showing that their subsidiaries are fully capitalised in line with Basel II and III accords.
“The increases reflect efforts to strengthen the banking sectors in those countries even as global banks have also been seeking ways to boost capital adequacy ratios in their home countries to meet increased capital requirements under Basel III, and one option they have explored has been the disposal of international subsidiaries,” she in a statement said.
The CBN said these capital demands from foreign subsidiaries are not in tandem with the level of growth in business activities in these lenders. It said it would not allow banks to continue funding their subsidiaries from parent companies but would encourage them to consider mergers and acquisitions with other local or foreign banks in host country.
“The CBN shall not permit any further capital outlay from parent banks to augment the capital needs of foreign subsidiaries but would rather encourage banks to consider mergers and acquisition arrangements with other local and or foreign banks in the host country. Under no circumstances are parent banks allowed to guarantee the deposit of their foreign subsidiaries,” Martins said.
The banks face the most near-term pressure in their Zambian operations, where the minimum capital requirement for foreign banks has been raised from $2 million to $100 million and to $20 million for local banks, with a December 31, 2012 deadline for full compliance.
Babatunde Obaniyi, Head, Market Risk, Greenwich Trust Limited, said the CBN directive on offshore funding will reduce operational risks for the lenders and protect local economy.
He told The Nation that said since the parent banks which have the capital are already incorporated in Nigeria, the apex bank is just being proactive to ensure that the funds that would have been used to develop Nigeria’s economy are not channeled to other economies.
Obaniyi said the apex bank took that decision because for a bank to operate offshore, it has to firstly, raise its capital base to the required N100 billion. And for a bank like United Bank for Africa with 18 offshore subsidiaries and Access Bank with nine subsidiaries, among others, recapitalising all these susbsidiaries where there is sudden increase in capital bases may deplete their funds.
He explained that although there are some African countries, especially The Gambia where investors cannot just bring hot money to fund banks, but polices in many African countries points to the fact that more countries want foreign banks to recapitalise their subsidiaries with funds from home country.
He said some of the banks have leant to share risks with local banks to reduce the economic risks that come with foray into new markets.
“The level of aggression most Nigerian banks exhibit in venturing into new markets, if not checked, will raise their operational risk level. Besides, I do not see the restriction of these banks into foreign countries as having the capacity to deplete their Group performance because some of these markets are smaller than Nigeria’s,” he said.
Renaissance Capital (RenCap), an investement and research firm, said in an emailed report that CBN’s target is to retain capital in the country, as it seems more focused on the recapitalisation of Nigerian banks’ existing subsidiaries. However, there is less clarity about the deployment of capital for future or new subsidiaries.
It said the policy could affect FirstBank and GT Bank, given their planned expansions outside Nigeria in the medium term. She said that the policy poses a clear risk to future external growth prospects for Nigerian banks offshore adding that the CBN needs to provide additional clarity about how this directive affects the banks’ offshore expansion plans, which for some banks are core to their medium-term growth strategies. It added that most of these banks are expected to develop their own products and services to meet the needs of the people.
