Private jet, windfall tax and new capital base for banks

The banking industry is always in the news for many reasons, but the last week has offered enough to fill newspaper pages. While the government wants the banks to pay tax on the excess profits they made last year, a bank chairman openly upbraided some institutions for buying private jets for their executives.

The two issues have dominated discussions in many circles and I was therefore not surprised that they did find their way, with a dose of humour, into a lively and educative webinar discussion organised by Coronation Merchant Bank on Tuesday, August 6. The theme was ‘’Understanding Bank Capitalisation: Rights Issues and Opportunities for Investors’’, and Okey Umeano, the chief economist of the Securities and Exchange Commission (SEC), was the keynote speaker.

Discussants were Bolanle Adekoya, partner at PwC and head, capital market accounts advisory services practice for West Africa; Ayokunle Olubunmi, head, banking and non-bank ratings at Augusto; and Olusegun Owadokun, deputy chief executive of Coronation Securities.

The star-studded event was moderated by Wole Famurewa, an anchor at CNBC. It was designed as a teaching session to educate investors, especially retail investors, on the intricacies of banking recapitalisation, the significance of rights issues and how to make the right investment decisions. Coronation Merchant Bank is the issuing house to many banks, notably Access Holdings’ 17.77 billion ordinary shares offered as a rights issue. The offer closes next week and there are indications that both the institutional and retail shareholders have been quite excited about the offer.

With the deluge of new equities coming to the capital market, the webinar was quite timely and Umeano did justice to the topic. He advised investors to carefully analyse the financial statements and other documents of the issuer, particularly the reasons for the offer before a final investment decision is made. ‘’Read all the offer documents sent to you and think in terms of diversification. You must always diversify your portfolio; so, bear in mind that rights issue could lead to concentration of portfolios,” he told participants.

He said that the SEC and the CBN are collaborating and working a lot more closely, leveraging their respective IT capabilities, to ensure that the investing public is well protected and served. ‘’The two regulators are now working faster and better with the use of technology, and are committed to better services. SEC wants a very transparent market and continued education of the investors, and that’s why I commend Coronation Merchant Bank for putting together this webinar,” Umeano said.

Umeano noted that the banks will have to raise about N4.2 trillion in new capital, mostly through public offerings and right issues. There may also be some M&As. He stated that rights issues have been the most popular and the most widely adopted of the three in the last five years for the following reasons: the issuer bears lower costs in right issues, not only in terms of fees but also in advertising costs.

Right issues do not bring new shareholders, and so the ownership structure is maintained; the register is easier to manage; they’re usually priced below market value, and if unsuccessful, there’s the option of selling the unsubscribed portion as a public offer. The chief economist reiterated that the issuer has a statutory obligation to disclose everything about the right issue to the investors, especially the purpose of the offer; risks; timelines and post-offer implementation plans.

To illustrate the potential for banking growth, Umeano noted that the Nigerian economy is made up of a large portion of the informal sector that is largely unbanked or underbanked. Banks should explore opportunities in the informal sector and in other parts of Africa which requires a lot of investment capital. He explained the roles of the SEC as a regulator and the parts played by the various parties in an offer. He concluded that there is potential for growth in Nigeria’s capital market and the economy as a whole, and assured of regulatory support for banks during recapitalisation.

‘’Banking is a growing sector; many applications for banking licences are in the offing and those who have recently come into the sector are doing well,” he concluded. In her contributions, Bolanle Adekoya asked investors to pay attention to ‘’the banks’ track records’’, adding, ‘’equity is a long-term play; look out for dividend payout records; educate yourself about our capital markets; some of our companies are undervalued. Rights issues help you to avoid dilution’’. She said that the capital market has the potential to contribute up to 30% of GDP. ‘’The banking industry has a good track record in rights investments’’, she concluded.

Olusegun Owadokun, deputy chief executive, Coronation Securities, deepened the discussions by explaining that banks would actually prefer to grow their capital base organically by not paying dividends and reinvesting earnings. But since that is not always the case, and the shareholders deserve their rewards, rights issues are always the preferred option.

There were many questions from participants, who clearly were retail investors, during the Q&A; and the discussants were up to the task. One person asked, ‘’What is the guarantee that the capital the banks are raising would not be used to pay the windfall tax?” I added, quite mischievously, ‘’and also buy private jets’’. The laughter was loud enough to move the needle on the Richter scale! When the laughter subsided, Kunle Olubunmi of Augosto calmly explained that since much of the excess profits were not realised, the impacts of the so-called windfall tax would be minimal. He urged the investing public not to lose sleep over it.