As Nigeria charts its course through current economic headwinds, the path forward remains uncertain especially with the planned recapitalisation of banks mostly likely to headline the course of the financial system in the year.

There is no doubting the fact that the nation stands at a pivotal juncture, where the interplay of inflationary pressure, tightening measures, liquidity dynamics and currency challenges will shape its economic destiny in the coming months.

According to Comercio Partners, investors are currently watching these trends as the country braces for the next chapter of the economic odyssey.
In its 2024 macroeconomic outlook titled ‘Finding rain in drought’, the organisation said the planned Central Bank of Nigeria’s banking recapitalisation policy is poised to reshape the trajectory of deposit money banks (DMBs).

At the 58th Annual Bankers’ Dinner of the Chartered Institute of Bankers of Nigeria (CIBN), the CBN governor, Olayemi Cardoso, revealed that the recapitalisation would aim at supporting the $1 trillion economy as envisaged by President Bola Tinubu.

Indeed, Cardoso emphasized the pivotal role assigned to banks in the grand scheme of this economic metamorphosis. Though the declaration has since gained momentum in the financial space, it equally calls for introspection before the take-off.

The Comercio Partners’ research noted that the identified patterns of share price evolution among the banks under review provide not only a reflection of market sentiment but also a lens into the underlying forces at play during this pivotal period of recapitalisation.

The document noted: “The discerned steady increase in the share prices of the selected banks denotes a positive market response to the impending recapitalization. This upward trajectory could be indicative of investor confidence in the ability of these banks to successfully navigate the capital requirements, suggesting a perceived alignment between their strategic initiatives and market expectations. The consistent climb in share prices serves as a qualitative indicator of market optimism and may imply a favourable outlook for the banks in question.”

The report also stressed that the consolidation phase following the announcement of the recapitalisation initiative carries significant implications, adding that this period of consolidation is likely reflective of market participants reassessing their positions and adjusting investment strategies in response to the anticipated changes.

It added that the consolidation might also indicate a period of strategic recalibration within the banking sector, as institutions position themselves to meet the new regulatory requirements and analysing the nature of the consolidation provides an opportunity to identify trends in investor behaviour and potential shifts in market dynamics.

It maintained that the market’s response indicates an expectation of enhanced strategic planning and execution capabilities among the banks, as they are granted additional time for compliance. The greater rally post-deadline extension not only underscores the sensitivity of market dynamics to regulatory timelines.

Commenting on the bank stocks’ phenomenal growth, the research observed that the 230 per cent growth in Access Bank’s share price was a conspicuous signal of market enthusiasm and positive sentiment surrounding the bank.

Also, it said the Zenith Bank’s 130 per cent growth in share prices echoes a similar sentiment of heightened investor confidence. On the overall implications for the Nigerian banking sector, the research said: “The overarching trend of substantial growth across multiple banks implies a collective resurgence of confidence in the Nigerian banking sector. This renewed optimism is likely predicated on a broader belief in the success and sustainability of the recapitalization efforts. Investors appear to be responding favourably to the strategic moves and financial resilience demonstrated by these banks, potentially indicating a positive ripple effect across the entire sector.”

But can the present state of the economy sustain a broad base recapitalisation?
“A nuanced evaluation of each bank’s capital adequacy, liquidity position, and overall financial robustness contributes to the assertion that identified banks are not merely equipped to meet the new recapitalisation threshold but are also strategically positioned to thrive in the evolving financial landscape. The implications of this observation extend beyond mere regulatory compliance, encapsulating a broader spectrum of financial resilience, risk management and strategic foresight,” the report stated.

It declared that given the prospect of a worst-case recapitalisation scenario set at 10 times the current requirement, prudent investors are advised to consider taking positions in banks that demonstrate financial resilience and preparedness for such stringent capitalisation levels.

Comercio identified Zenith, Access Bank, Ecobank, Fidelity, GTCO, First Bank and Union Bank as capable of handling the emerging scenario. It also stated that banks facing potential acquisition might witness shares being traded at a premium, saying investors who are keen on capitalising on the dynamic should carefully time their entry into the market.

Monitoring regulatory announcements, acquisition rumour and shifts in market sentiment can provide insights into opportune moments for investment. The ability to anticipate and respond swiftly to developments in the merger and acquisition (M&A) landscape will be crucial for maximising returns in this context.

On what awaits the value of the naira as 2024 marches on, the report sees the impact of the CBN governor’s policies and the challenge of rising inflation as key factors to watch. The report stressed that these would introduce elements of uncertainty.

It added that the efficacy of the CBN’s policies on FX liberalisation, coupled with its strategies to manage the reserves, emerges as a critical determinant of the naira’s trajectory.

It added: “A delicate balance between transformative opportunities and persistent challenges marks Naira’s journey in 2024. The interplay of new CBN policies, acceleration of growth and the response to rising inflation will collectively shape the Naira’s resilience and stability in the coming year. Vigilance, adaptability, and strategic policy adjustments will be key elements in navigating the complex economic landscape.”

Looking ahead to 2024 local fixed income, Comercio Partners anticipates that domestic borrowings may surpass estimates due to the minimized use of the ways and means window.

“Regarding foreign borrowings, the expectation is that global interest rates will remain prohibitively high in 2024FY, as market prices in the possibility of rate cuts from the year’s second half of the year. Consequently, we do not anticipate the federal government tapping into the Eurobond market in 2024.”

Foraying into the sub-Saharan African (SSA) region, the report noted that the prolonged dominance of a stronger dollar casts shadows, heightening debt-servicing costs for the nations in the region.

According to the report, foreign capital inflows, seeking refuge in advanced economies with higher returns and perceived safety, exert continued pressure on the region. This confluence of challenges, from escalating debt-servicing costs to capital outflows and potential economic headwinds, poses an elevated risk of credit issues for SSA nations.

Worryingly, it declared that the looming threat of credit rating downgrades hovers over countries grappling with increasingly precarious fiscal positions against the backdrop of enduring high interest rates. Nigeria with a nearly 20 per cent interest rate takes a share of the concern.

In its report on South Africa, it noted that inflation, which is a persistent concern, is expected to remain above the South African Reserve Bank’s target in 2023, driven by currency depreciation and the cost of load-shedding.

However, a forecasted decline to 5.5 per cent in 2024 and 4.5 per cent in 2025 offers a ray of hope. It added: “This anticipated moderation could pave the way for the Reserve Bank to consider easing monetary policy, providing some relief to the broader economy.”

The report noted that Kenya, known for its economic vibrancy, is facing an unprecedented financial challenge in 2024. It maintained that amid monumental fiscal turbulence, a lifeline $938 million financing agreement from the International Monetary Fund (IMF) is crucial at this time.

This agreement, though still pending board approval, provides immediate access to $682 million, offering a respite for Kenya’s fiscal challenges.
The funds aim to bolster external reserves ahead of the crucial June Eurobond payment, supporting public finances and the shilling.

Still on its 2024 economic outlook for East Africa, the report said: “Kenya’s fixed income outlook in 2024 is a delicate dance on the financial tightrope. The nation is caught between the urgency of meeting debt obligations, the imperative for a credible Eurobond buyback, and the looming threat of default.

“As the Eurobond payment deadline approaches, Kenya’s ability to execute strategic financial maneuvers will determine its resilience in the face of mounting challenges, echoing the broader narrative of emerging markets grappling with the complexities of global financial dynamics.”