Stocks End Five-day Rally as MSCI Defers Decision on Nigeria

•  Atlas Mara raises capital to increase stake in Union Bank

Goddy Egene and Obinna Chima with agency reports

Nigerian stocks fell 2.6 per cent Wednesday after global index provider, MSCI, said it would leave the country in its frontier index until at least November, when it will again assess investor access to the market.

MSCI said Nigeria would remain a frontier market, with the possibility of being downgraded to “standalone” status, leading shares to retreat.

According to Reuters, the index of Nigeria’s top 10 banks, its relatively liquid sector, shed 2.6 per cent partly on the MSCI news, and after Etisalat Nigeria failed to agree a debt renegotiation deal with lenders.

The Nigerian Stock Exchange (NSE) All-Share Index slid 2.6 per cent to close at 33,477.89, ending a five-day winning streak. Similarly, market capitalisation fell by the same margin from N11.89 trillion to close at N11.58 trillion.
On the banking index, Skye Bank Plc shed 5.0 per cent, while EcoBank Transnational Incorporated and FBN Holdings Plc fell by 4.9 per cent apiece.

Diamond Bank depreciated by 4.6 per cent, just as Zenith Bank Plc and Access Bank Plc went down by 3.9 per cent each. Guaranty Trust Bank Plc and Fidelity Bank Plc also fell by 2.5 per cent and 1.5 per cent, respectively.
However, the volume and value of trading rose by 29.7 per cent and 52.1 per cent, respectively, to 508.7 million shares worth N6.4 billion, from 392.268 million shares valued at N4.217 billion traded on Tuesday.

MSCI on Tuesday said it was undertaking an index review of Nigeria, China, Saudi Arabia and Argentina, and was slated to announce its decision that night.

Nigeria was under review for possible demotion from the MSCI’s frontier markets index to “standalone” status.
Market analysts had indicated that the newly introduced Investors’ and Exporters’ (I&E) foreign exchange window targeted at foreign portfolio investors could earn Nigeria reprieve from being demoted from the MSCI’s frontier markets index.

This, according to the index provider, stemmed from “continuous deterioration of the market accessibility” after the introduction of restrictions on foreign currency trading in 2015.

Eleven Lagos-listed stocks on the Nigerian Stock Exchange (NSE) are currently on the MSCI Frontier Markets 100 index with a weighting of around seven per cent. That is the fourth largest after Kuwait, Argentina and Vietnam.

MSCI eventually announced its decision to delay a potential reclassification of its Nigeria frontier market index to “standalone” market status till November.

The delay would temporarily save Nigeria from the ignominy of another removal, having been delisted by U.S. investment bank, JP Morgan & Chase, from its Government Bond Index for Emerging Markets (GBI-EM) in September 2015, and Barclays from its emerging markets local currency government bond benchmark in February 2016.

In a statement on the results of the MSCI 2017 “Market Classification Review”, obtained Wednesday, the index provider said: “To date, investors seem to be cautiously optimistic on the effectiveness of this new window but still require more time to test it further.”

It added: “As a reminder, the Central Bank of Nigeria (CBN) pegged the local currency to the U.S. dollar in the first half of 2015, resulting in a sharp decline in liquidity on the foreign exchange market, particularly at the beginning 2016.

“Hence, the ability of international institutional investors to repatriate capital has been significantly impaired to a point where the investability of the Nigerian equity market is being questioned.
“Additionally, the decision on the potential removal of the MSCI Nigeria Index from the MSCI Frontier Markets Index has been delayed to November 2017 to allow more time for international institutional investors to better assess the effectiveness of the new FX trading window introduced by the Central Bank of Nigeria.”

Last April, the CBN had introduced a new FX trading window for investors and exporters aimed at facilitating the repatriation of capital.

The CBN further recently revealed that cumulative transactions on the new I&E window had risen to $2.2 billion, from about $1 billion last month.

CBN interventions in the I&E window have dwindled to below 30 per cent, enabling participants to freely trade currencies at a market determined rate.

Alongside Nigeria, MSCI also announced that the MSCI Argentina Index will not be reclassified to emerging markets status, as investors expressed concern that the recently implemented market accessibility improvements, including the removal of capital controls and FX restrictions, needed to remain in place for a longer time period to be deemed irreversible.

Consequently, the MSCI Argentina Index will remain on the review list as part of the 2018 Annual Market Classification Review.

The index provider also announced that beginning from June 2018, it will include China A shares in the MSCI Emerging Markets Index and the MSCI ACWI Index.

This decision, it explained, has broad support from international institutional investors with whom MSCI consulted, primarily as a result of the positive impact on the accessibility of the China A market of both the Stock Connect programme and the loosening by the local Chinese stock exchanges of pre-approval requirements that can restrict the creation of index-linked investment vehicles globally.
Consequently, MSCI plans to add 222 China A Large Cap stocks, representing on a pro-forma basis approximately 0.73 per cent of the weight of the MSCI Emerging Markets Index at a 5 per cent partial Inclusion Factor.

Atlas Mara to Increase UBN Stake

Meanwhile, global financial services holding firm, Atlas Mara Ltd., which has dropped almost 80 per cent on the London Stock Exchange (LSE) since an initial public offering led by co-founder Bob Diamond, plans to raise more than its market value by selling a 35 per cent stake to Fairfax Africa Holdings Corp.

The firm, which specialises in bank acquisitions in Africa, expects to get $200 million from selling new stock to existing shareholders and Fairfax Africa and will also issue a fresh convertible bond to the Toronto-based investment company, Atlas Mara said in a statement Wednesday.

Atlas Mara will use the proceeds to boost its holdings in Union Bank of Nigeria Plc to 44.5 per cent from about 31 per cent, reported Bloomberg Wednesday.

Atlas Mara, which owns banks in seven African countries, has plunged in value since its December 2013 IPO after growth across the continent slumped and currencies weakened amid a commodities rout.

Diamond, 65, in February ousted Chief Executive Officer John Vitalo and pledged to cut annual operating costs by $20 million after rising expenses threatened the company’s ability to expand through acquisitions.

Union Bank, Atlas Mara’s single biggest investment in Africa, is Nigeria’s worst-performing bank stock this year. It announced plans to raise capital through a rights issue in November as the country’s Tier 2 lenders struggled to cope with a contraction in the economy of Africa’s biggest oil producer.

Atlas Mara agreed to acquire an indirect 13.4 per cent shareholding in Lagos-based Union Bank from the Clermont Group for $55 million, it said.

Union Bank is going through regulatory approvals and will then start the share sale, spokeswoman Ogochukwu Ekezie said.

“A strategic partnership with Fairfax Africa creates a strong relationship between two like-minded, long-term investors in Africa,” Atlas Mara said. “Each is focused on capitalising on the long-term growth potential of Africa and provides permanent capital to support growth.”

The partnership with Fairfax Africa, which last year bought Zurich Insurance Group AG’s South African business and rebranded it Byte Insurance, will give Fairfax four of the nine seats on Atlas Mara’s board.
A new management incentive plan will also be put in place, while Diamond will continue as Atlas Mara’s executive chairman, the company said.

Existing investors face a dilution of about 35 per cent, according to data compiled by Bloomberg.
Fairfax Africa agreed to buy at least 30 per cent of the $100 million of new shares at a price of $2.25 apiece, representing an implied purchase price of 0.33 times book value, the company said in a separate statement.

Atlas Mara’s stock has traded at an average this year of $2.26, according to data compiled by Bloomberg. The shares rose 1 per cent to $2.54 as of 1.05 p.m. in London Wednesday, giving the company a market value of $197.5 million.
“Banks are at the forefront of economic development in sub-Saharan Africa,” Prem Watsa, Fairfax Africa’s chairman, said in the statement.

“Atlas Mara represents a unique opportunity to invest in many profitable banks in the region at a very attractive valuation,” he stated.