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🇳🇬 Nigeria /Economy & Trade

CBN foreign subsidiary rule sparks N1.92trn loss on NGX

From The Punch · (6m ago) English Critical tone

Summarized and contextualized by DistantNews.

TLDR

  • Nigerian stock market experienced a significant loss of N1.92 trillion on Thursday.
  • The decline was attributed to sell-offs in banking and cement stocks following new Central Bank of Nigeria guidelines on foreign subsidiaries.
  • An investment banker described the situation as temporary, noting that affected banks remain fundamentally strong.

The Nigerian stock market faced a substantial downturn on Thursday, with investors shedding N1.92 trillion in value. This sharp decline was triggered by the Central Bank of Nigeria's new regulatory directives concerning the foreign subsidiaries of commercial banks. The market capitalization fell by 1.23%, from N155.780 trillion to N153.858 trillion, and the All-Share Index also saw a similar decrease.

The drop in the ASI and market capitalisation came from market reactions to the new CBN guideline that compels banks operating in foreign countries to limit their investment in foreign subsidiaries to 10 per cent of their equity capital or shareholders’ funds.

— Mr. Tajudeen OlayinkaExplaining the direct cause of the stock market decline.

Investment banker Mr. Tajudeen Olayinka explained that the new guideline compels banks with foreign operations to limit their investments in these subsidiaries to 10% of their equity capital or shareholders' funds. Banks exceeding this threshold are required to divest. This directive has been interpreted by the market as a move to integrate foreign revenues and reserves into regulatory capital, potentially impacting corporate payout capabilities.

The market’s immediate interpretation is that the CBN is effectively integrating revenues and other reserves of banks operating in foreign countries into their existing regulatory capital.

— Mr. Tajudeen OlayinkaInterpreting the market's reaction to the CBN directive.

The immediate consequence was a significant repricing of international banking stocks, which subsequently dragged down other highly capitalized equities, particularly in the cement sector. Despite the immediate negative reaction, Olayinka believes the downturn is temporary. He emphasized that the affected banks are fundamentally strong and undervalued, suggesting that current sell-offs might be a missed opportunity for investors. The Nigerian stock market, while experiencing volatility, remains a dynamic environment where such regulatory shifts can cause significant, albeit potentially short-lived, market movements.

This will limit their corporate payout capabilities or make future payouts dependent on growth trajectories.

— Mr. Tajudeen OlayinkaFurther explaining the implications of the CBN guideline.
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Originally published by The Punch. Summarized and contextualized by our editorial team with added local perspective. Read our editorial standards.

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