See what Bloomberg wrote about Devaluation of the Naira

International business website, Bloomberg, has written a new article on the recent devaluation of the Naira. According to the magazine, the excitement from the devaluation is shortlived as the Nigerian economy has since sunk further. 

Read the article below:

Optimism that a devaluation of Nigeria’s naira would breathe life into the country’s banking stocks faded almost as quickly as it started.

The central bank’s abandoning of a 16-month currency peg was greeted with a world-beating rally in the nation’s shares on expectations foreign investors would return to Africa’s largest economy. It didn’t last, with all but two of the country’s biggest banking stocks falling since the naira started trading freely on June 20.

The main risk is coming from a possible recession that will make it harder for lenders to make money and extend credit with unpaid loans on the increase. Trading in foreign currency, which all but dried up because of the exchange controls, is yet to pick up. Foreigners have not flocked back amid lower oil prices and the U.K.’s vote to leave the European Union, with investors such as AllianceBernstein LP and Loomis Sayles & Co. saying the naira’s 29 percent depreciation isn’t enough.

“The devaluation of the naira is not a silver bullet,” said Jaap Meijer, the managing director of research at Dubai-based Arqaam Capital Ltd., who helped his clients make a 55 percent return if they followed his advice over the past three months on Guaranty Trust Bank Plc, Nigeria’s biggest lender by market value. “There are just too many headwinds, with a devaluation probably worsening the asset quality outside the oil and gas industry.”

For a foreign-currency column on the naira’s devaluation, click here.

The 10-member Nigerian Stock Exchange Banks Index has declined 6 percent since surging to a 9-month high on June 23. That compares with a 4 percent drop in the NSE All Share Index over the same period, with Sterling Bank Plc, Unity Bank Plc, Zenith Bank Plc and FBN Holdings Plc among the 10 biggest losers.

‘Natural Concern’

“The ability of companies to pay back the money that banks have given them is a natural concern,” said Adewale Okunrinboye, an analyst at Lagos-based Asset & Resource Management Co., which has 690 billion naira ($2.4 billion) under management. “Companies will be struggling to sell products and generate cash flows.”

Not everyone is bearish on banks following the devaluation, with the country’s lenders trading at 4.5 times future earnings compared with 9.2 for South African banks, according to data compiled by Bloomberg.

“The benefits outweigh the risks,” although smaller lenders may struggle to replenish capital levels, said Derrick Mensah, an analyst at African Alliance in Accra. “Net-net the depreciation is positive, not just for banks, but for the broader economy. It’s not going to happen overnight.”

Long Dollars

Most of the country’s biggest lenders have long-dollar foreign-exchange positions, which will result in revaluation gains that will compensate for any deterioration in the quality of their assets and capital levels caused by the currency’s decline, Renaissance Capital analysts Adesoji Solanke and Olamipo Ogunsanya said in a June 27 note. An interest rate increase will also help improve margins on loans, they said.

“The economy might not immediately return to growth, but at least the bleeding should stop,” said Ronak Gadhia, an analyst at Exotix Partners LLP in London, who has buy ratings on Guaranty Trust Bank and United Bank for Africa Plc, and sell recommendations on Access Bank Plc and Skye Bank.

“If the foreign-exchange market functions properly, it should allow bank customers to source foreign currency, which is a positive,” he said. “It will enable the banks to grow their letters of credit and commission income.”

Rules Delayed

Nigerian authorities delayed by at least a year the introduction of more stringent capital rules for banks on June 27, as the regulator seeks to spur the economy and encourage lending. The economy shrank for the first time since 2004 in the first quarter as investment shriveled and businesses battled to find dollars to import materials.

The ratio of loans not paid for more than three months worsened to 4.9 percent at the end of last year from 2.8 percent in 2014, according to the Nigeria Deposit Insurance Corp. The naira, which weakened to a record low of 286.50 per dollar on June 21, gained 0.1 percent to 282.50 by 7 a.m. in Lagos.

Nigeria may have to again consider buying bad debts to reverse a contraction in lending, Arqaam’s Meijer said. Regulators six years ago had to rescue the industry from collapse after a debt crisis and amid allegations of corruption, setting up the Asset Management Corp. of Nigeria to take on non-performing loans.

“There are a lot of issues that haven’t been addressed that still need to come through in terms of asset quality,” with the devaluation probably increasing leverage by 20 percent and pushing foreign-exchange loans to 50 percent of the system, he said. “A weak banking sector isn’t conducive to economic growth.”