The second-largest stock exchange in Africa by market capitalisation is in Nigeria, with the two primary exchanges, the Nigerian Stock Exchange (NSE) and the FMDQ OTC Securities Exchange, offering a sophisticated suite of listing and trading services, licensing services, market regulation and data solutions, and technological offerings. The introduction of foreign exchange (FX) futures trading on FMDQ in mid-2016 is a major step towards the market’s goal of offering increasingly sophisticated investment and risk-management products and services.
Furthermore, a push for further regional and international integration, through international dual listings, the West African Capital Markets Integration (WACMI) programme and other initiatives, will serve to solidify Nigeria as a major player in both regional and global capital markets.
As was the case in a large number of emerging and frontier markets faced with low oil prices and anticipated interest rate hikes in the US, the Nigerian capital markets had a difficult year in 2015, with the NSE All Share Index falling by 17.36%. By the fourth quarter of 2015, average daily trading volumes were 37.5% lower year-on-year. However, 2016 has seen a more favourable performance, with the index steadily rising over the second quarter of the year, although it is still down slightly from the beginning of 2016.
The remainder of 2016 and 2017 should see a steady increase in activity and capital inflows. This will be aided in large part by several substantial projects that the capital markets authorities currently have in the pipeline. These projects include demutualisation of the exchange, the launch of new instruments, a handful of expected listings and the continued rollout of a Capital Market Master Plan for 2015-25 – although a number of domestic developments, including currency volatility, increased non-performing loans (NPLs) and major government reforms through the first half of 2016, have contributed to a broader sense of uncertainty.
Equity Markets Structure
The NSE was made up of 190 listings as of December 2015, a drop from the 197 recorded at the end of 2014. According to the NSE’s fourth quarter 2015 factsheet, in 2015 the equity portion of the exchange was comprised of three listings on the premium board, 176 listings on the main board and 11 list on the Alternative Securities Market (ASeM), which is a specialised board established for small and medium-sized enterprises (SMEs). In 2015, a total of 53.8% of transactions stemmed from domestic sources, while foreign investors accounted for 46.21%. Total foreign transactions fell by 33.4% from N1.54bn ($4.9m at the time of printing) in 2014 to N1.03bn ($3.3m) in 2015. Total equity market cap dropped by 14.2% to N9.86trn ($31.1bn) at the end of 2015. Large-cap listings, as defined by market cap of greater than $1bn, accounted for 69.1%, or N6.81trn ($21.5bn). Mid-cap listings, defined as market cap of between $150m and $1bn, accounted for 23.8%, or N2.35trn ($7.4bn). Small capitalisation firms, those with market caps of less than $150m, comprised 7.1%, or N699.03bn ($2.2bn), of the total equity market.
The ASeM was launched in 2013 as a vehicle designed to encourage listing of SMEs by easing the listing requirements relative to those of the main board. Primary listing requirements include at least two years of operation as a registered business, audited financial accounts for at least two years, compliance with International Financial Reporting Standards, a public float of at least 15% and 51 or more active shareholders. The ASeM counted a total of 10 new listings in its inaugural year, but only one listing in 2014 and none in 2015.
The most heavily represented sector on the NSE is banking and financial services, which accounts for nearly 15% of the total equity market, although it contributes less than 3% to real GDP. The banking and financial services sector also provides much of the liquidity in the market, accounting for over 60% of trading volume on the NSE each week during the fourth quarter of 2015. Other major drivers in the economy, such as the agriculture industry, which represents only 0.3% of total capitalisation, are also under-represented on the exchange. The oil and gas sector, which accounts for approximately 10% of GDP, represents just 4.5% of market capitalisation. Overall, total trading volume on the exchange, which also includes corporate bonds, foreign exchange, eurobonds and derivatives, expanded by 32.7% in 2015 to N137.42trn ($433.8bn). Fixed-income trading volume is expected to remain strong in 2016 as the federal government issues fresh debt to fund its 2016 budget deficit and as corporations slowly increase the issuance of debt in capital markets as an alternative to traditional bank lending.
Nigeria currently operates a T+3 settlement through the Central Securities Clearing System. The NSE also adopted a system of direct cash settlement in January 2016. Previously, the proceeds from a trade were paid to the broker’s account, and it was the responsibility of the broker to then transfer those funds to the customer, which in some cases has led to excessive fees and mismanagement of funds. The new system strengthens investor protections by remitting the proceeds from a trade directly to the customer’s account. This move follows the August 2015 launch by the NSE of a N42m ($133,000) fund to compensate victims of fraud at the hands of certain equity dealers over the past two years.
Beyond the NSE All Share Index, which tracks the broader market, the NSE hosts several targeted indices, such as an index of sharia-compliant shares known as the NSE Lotus Islamic Index, and an index aimed at pension managers, the NSE Pension Index, and five sectoral indices – banking, consumer goods, insurance, oil and gas, and industrial.
Additionally, in August 2015 the NSE launched the premium board and an accompanying index, which lists companies that meet the exchange’s most stringent criteria regarding liquidity, capitalisation and governance. The premium board was developed as a means to attract the capital of international investors who are seeking high-quality listings in Africa. Criteria for membership on the premium board include maintaining a minimum market cap of N200bn ($631.4m), a free float of at least 20% of outstanding shares and achieving 70% or higher on the NSE’s internal corporate governance rating system, which it launched in November 2014.
As of the middle of 2016 there were three companies listed on the premium board – industrial conglomerate Dangote Cement and two financial institutions, First Bank of Nigeria (FBN) Holdings and Zenith International Bank – with a combined market capitalisation of N3.9trn ($12.3bn).
According to Nigeria’s National Bureau of Statistics (NBS), total capital inflows in the Nigerian capital markets, including the equity, bond and money markets, dropped by 53.5%, from a total of $20.8bn in 2014 to $9.6bn in 2015. Foreign inflows in equity markets specifically decreased by nearly 32% in 2015, from N692.39bn ($2.2bn) in 2014 to N470.83bn ($1.5bn) in 2015. Foreign outflows in equity markets also declined, from N846.53bn ($2.7bn) in 2014 to N554.23bn ($1.7bn) in 2015 – a reduction of 34.5% – according to the NSE. After doubling the amount of capital it attracted in 2014 relative to 2013, fixed income was the most negatively impacted in 2015, decreasing by a total of 68.2%, according to the NBS.
One major factor contributing to the weakness in the Nigerian bond market in 2015 was the removal of Nigeria from JP Morgan’s Emerging Market Government Bond Index in September of that year. Citing the restricted FX environment, the removal of Nigeria from the index resulted in an exodus of institutional investors. Foreign capital flowing to equity decreased by 24.3% in 2014 and 59.3% in 2015, likely due to a confluence of factors, including anticipated interest rate hikes in the US, lower energy prices and a more difficult global economic environment, among other things. Following the removal of Nigeria from the JP Morgan’s Emerging Market Government Bond index in September 2015, the total foreign capital flow which had increased by 47.7% from N1538.92bn ($4.9bn) in 2014 declined by 33.4% to N1025.07bn ($3.2bn) in 2015.
The exchange saw one new listing in 2015. The Transcorp Hotel offer, which listed 7.6bn shares, was undersubscribed, with investors only capturing 52.3% of the initial public offering (IPO). Nevertheless, the NSE listed the entire issue in January 2015. This was in addition to rights issuances from Access Bank for N41.8bn ($132m) and N30bn ($94.7m) from Flour Mills of Nigeria, as well as Skye Bank and Stanbic IBTC. However, the year-end performance presented a more mixed picture, with the NSE All Share Index down 17.36% for the year.
The ICT sector was the hardest hit, losing 55.5% in 2015. Financial services, which represents approximately 15% of the market, ended the year 21.8% lower, with a number of lenders grappling with regulatory changes and an increase in NPLs (see Banking chapter). The construction and real estate sector was also weak, losing 31.2% in 2015 as builders faced difficulties importing goods and equipment as a result of capital controls.
A number of other sectors saw growth over the course of 2015. In some cases, it was relatively modest, as with the oil and gas sector, which rose by 1.1%. However, agriculture and services were the big winners in 2015. Agriculture gained 20.6%, while shares in the services sector far outpaced the rest of the market, rising by 55.5%. Looking at the market in terms of size, large-cap and small-cap both dragged the market lower in 2015, falling by 20.6% and 5.3%, respectively, according to the NSE. Mid-cap companies, however, had a relatively strong year, rising by 8.3%. The NSE reported that total equity velocity – the total value of equities traded divided by the total equity market cap – dropped from 11.04% a year earlier to 7% in the fourth quarter of 2015.
Nigeria’s debt markets have seen comparatively stable performance over the course of 2016, albeit with a slight softening, driven by high demand, particularly from banks, for secure returns. Bonds are listed on both the NSE and FMDQ. As of the end of the second quarter of 2016, the NSE listed 64 bonds, of which 17 were federal bonds, 23 were sub-national issues, 22 were corporate and two were from supranational bodies, such as the IMF or the African Development Bank. The total bond market cap on the NSE was N7.16trn ($22.6bn), of which nearly 89% was composed of federal government bonds. Meanwhile, FMDQ had 66 naira-denominated bonds and 12 eurobonds with a market cap of N7.22trn ($22.8bn) and N830bn ($2.6bn), respectively, bringing the combined market cap to N8.05trn ($25.4bn). In the second quarter of 2016 FMDQ reported 20 federal government bonds (17 naira-denominated and three eurobonds), 21 sub-national, one issue by a government agency, 33 corporate bonds (24 naira-denominated and nine eurobonds), two from supranational bodies and one sukuk (Islamic bond), which was listed by Osun State in 2013. Federal government bonds also held the top position on FMDQ, making up 81.02% of total market cap. Corporates, however, play a larger role on the FMDQ platform, comprising 13.29% of the market, relative to only 3.2% on the NSE.
According to FMDQ, which represents the OTC market, turnover on federal government bonds traded on the FMDQ’s platform increased to N10.7trn ($33.8bn) in 2015, representing a 38.8% rise over 2014. Trade in Treasury bills also grew dramatically to N48.2trn ($152.2bn) for the full year in 2015, an 83% expansion over the previous year. The repo market, in which FMDQ invested significantly in 2015, grew to N32.6trn ($102.9bn), from N23.6trn ($74.5bn) in 2014, an upturn of about 33%.
In 2015, 20-year bonds garnered the most support among federal government bonds, with a 2.58 bid-to-cover ratio, which measures the demand for a bond offering, according to FMDQ. By contrast, fiveand 10-year offerings both fell below the 2 threshold, which traditionally indicates a strong bond auction, with bid-to-cover ratios of 1.96 and 1.99, respectively. The yield curve for the federal bond market on average declined by 5.94 percentage points in 2015, reflecting investor uneasiness with the economy.
Turning to Treasury bills, like in the bond market, offerings of longer duration were in greater demand. The average bid-to-cover ratio for 91-day Treasury bill stood at 1.77 in 2015, while the 182-day bill recorded 2.21, and the 364-day bill saw 3.03 in 2015. Turnover, however, told a slightly different story. Turnover of bills maturing between three and six months captured 30.71% of total market turnover, outpacing those associated with shorter and longer maturities. The total value of outstanding domestic bonds, including government and corporate issues, increased by 21.43%. The value of the eurobond market, however, was essentially unchanged in 2015. Greater bond market activity is likely in 2016 as the government seeks to fund its expansionary budget.
As with many of Africa’s capital markets, boosting churn and increasing liquidity is a perennial concern for Nigeria. Okon Onuntuei, acting head of strategy at the NSE, told OBG, “Liquidity is not an issue that is unique to Nigeria. It is a continental issue.” Furthermore, Edgar Ebinum, head of research for Cowry Asset Management, told OBG, “The equity market is not deep enough. That has been the major challenge. In the agriculture sector, for example, there are only two stocks listed. The float for these stocks is very low, and as a result any move into or out of the stock exchange by an institutional investor will have a dramatic effect on price.”
The same applies to the fixed-income market. Kaodi Ugoji, vice-president of strategy and corporate services at FMDQ, told OBG, “One of the issues in the bond market is liquidity. The corporate bonds being issued [in Nigeria] are not significant in size. One of the things to drive liquidity is the size of the bond issue, but you find that we have small issues… One pension fund administrator can buy up a significant portion of an issue and due to the long-term nature of pension investments, there is limited secondary market activity on such securities.” As a result, the NSE has sought to boost trading by domestic investors, not only to expand local participation in the market, but also to reduce the exchange’s exposure to investors who might be impacted by currency risk, which is currently a major issue for Nigeria’s economy. To that end, Onuntuei told OBG that the NSE “is taking a second look at the market-making structure”, which it first introduced in 2013 in an effort to boost liquidity and access, but which only had a limited impact due in part to the difficulties market-makers faced in accessing capital. Ebinum told OBG, “The regulators introduced market making, but it only lasted a few months and has since died. No one is talking about it anymore.”
The NSE has already stated that it is actively working to address these and other concerns in the hopes of revitalising the system. However, the exchange has yet to release detailed proposals and timelines. FMDQ is also embarking on an educational campaign to increase awareness of debt tools for corporates and projects. “Significant issues are corporate governance and time to market,” Ugoji told OBG. “These corporates have to be made more aware of the funding options available in the capital markets as most of them typically use bank loans to fund their projects. We expect to see this trend change with the implementation of Basel III in the near future.” With the push by the government to grow capital spending on infrastructure, the exchange is hoping to encourage the uptake of infrastructure and project bonds.
One major initiative in development that could help improve liquidity on the country’s exchanges is the WACMI programme, which would more closely integrate the stock exchanges of Côte d’Ivoire, Ghana, Nigeria and Sierra Leone, eventually allowing brokers from each country to trade directly on any of the four exchanges. Inaugurated in January 2013, the programme is divided into three phases. The first phase allowed foreign brokers to trade in participating countries using a domestic broker as an intermediary. The inaugural trade of the initiative occurred in July 2015 between Nigerian investment firm United Capital Securities and Ghana’s CAL Bank. Under the second phase, a subset of brokers will be licensed to trade directly on other exchanges, without the need of an intermediary. The third and final phase envisions a cloud-based trading platform, in which brokers can trade on any of the four exchanges directly from their local computer and equity issuers have direct access to capital across the region. According to Onuntuei, the programme, while still in its infancy, with less than 10 cross-border trades executed as of March 2016, is expected to move into the second phase in early 2017.
To help raise exposure of equity listings worldwide, particularly among large international institutional investors, the NSE penned a strategic agreement with US-based MSCI in March 2015 to develop a suite of co-branded indices that track the Nigerian equity market. Later in 2015, the NSE introduced a programme designed to allow crosslisting for exchange-traded funds on the Nairobi and Johannesburg stock exchanges.
Another substantial reform currently in the works is a planned transformation for the NSE in terms of ownership. The NSE is currently a member-owned entity, but through the process of demutualisation, the exchange expects to convert to a publicly traded, shareholder-owned institution listed on the floor of the NSE by the first half of 2017. Under the current plan, the country’s Securities and Exchange Commission (SEC) has ruled that a single individual or entity is limited to no more than 5% of the total shares or voting rights associated with the demutualised exchange.
The NSE cites a number of benefits that it expects to result from demutualisation, including a reduction in the potential for conflicts of interest and the ability for the NSE to make external investments in equity rather than only cash-only transactions, as is currently the case. Additionally, it adds a layer of transparency and corporate governance by expanding the number of NSE shareholders. Citing its first quarter 2017 target for completion, Onuntuei recognised that “there is a lot that we need to do and a very short time in which to do it”. One of the major sticking points that Onuntuei cited will be the creation of a legal framework that will develop and support the newly demutualised exchange.
The decline in the NSE’s All Share Index over 2015, along with broader macroeconomic headwinds, would normally dampen prospects for new listings. The low valuations of certain sectors, such as banking, generally limits the appeal of new issues, but a handful of major prospects are nonetheless in the pipeline, which could significantly boost capitalisation and trading activity.
To help overcome some of these concerns, the NSE is improving disclosure and working to reduce listing and transaction fees. Disclosure can be a hurdle for prospective companies, and the NSE has sought to improve the capacity of listed firms to adequately meet disclosure requirements. “Corporate disclosure has improved, but there is still much to be done. Previously, companies would release a handful of numbers, but not enough information so that investors could analyse the results,” Ebinum told OBG. “Now disclosures are getting more in depth. Some sectors have made a certain level of disclosure compulsory.”
There are a few large-cap companies that are reportedly considering listing on the exchange. One of the most notable is MTN Nigeria. According to a July 2016 Reuters report, the South African-owned telecommunications enterprise is considering listing its Nigerian subsidiary on the NSE in 2017, after reaching an agreement in early 2016 concerning a fine imposed on the company by the government of Nigeria in the previous year. The $3.9bn fine imposed on MTN Nigeria in 2015 related to the company’s failure to disconnect 5.1m unregistered mobile phone customers in the country. The $1.7bn settlement will be paid over the next three years and will be funded through revenue generated in Nigeria over that period, according to Bloomberg.
Other potential listings, according to local media, include the Nigerian-owned airline Arik Air, which anticipates a private placement to investors in 2016, followed by a full IPO in 2017. The NSE should also benefit from the government’s push to sell stakes in a number of enterprises owned by the state.
The most anticipated among these is the sprawling state oil company, the Nigerian National Petroleum Corporation (NNPC), which the government is looking to break up into a number of smaller entities. Beyond the boost to market capitalisation, listing the NNPC would also help improve transparency in the company’s financials, which is much needed in the wake of a 2016 audit, the first in several years, that found the firm had withheld $16bn of oil revenues from the state. According to the media, the NNPC plans to list a portion of its assets on the NSE by 2018, with a full IPO to follow.
The regulator for the country’s capital markets is the SEC, which in recent years has taken aggressive steps to improve oversight, enforcement and market development. The bulk of its current activity is guided by the 10-year Capital Market Master Plan, which was launched in 2015 and seeks to boost liquidity, streamline regulation and increase financial inclusion (see analysis). Onuntuei told OBG, “They have thought very long and hard about the roadmap and how we can get to a more robust capital market. They are on board. They are willing to engage the stakeholders that they need to engage, and they also keep an open mind in terms of ideas and solutions to move the country forward.”
As part of the master plan, one of the biggest priorities for the SEC over the next 12 months is the drafting, review and finalisation of rules governing the rollout of derivatives at the NSE, which should be in place by 2017. The SEC has also sought to improve transparency and trust in the system, with some success, by mandating more robust financial disclosures by listed companies, maintaining its investigations into allegations of fraud and increasing minimum capital requirements to grow the market. Uwa Osadiaye, vice-president of FBN Capital, told OBG, “There is more trust in the system today than there was 10 years ago. The SEC is working with groups of investor communities to improve the ethics of businesses, punish rule breakers and put the investor first. But it is still a work in progress. They have shown that they are willing to enforce the law.”
The SEC has taken steps to level the playing field, making the market safer and more attractive to investors of all levels, including retail investors and other small players that may have limited recourse in addressing their concerns. The exchanges are also tightening up oversight of their members, ensuring compliance and best practices. The NSE has set up increased supervision of firms’ policies and protocols, which is part of the bourse’s push in late 2015 to assess whether brokers and dealers were meeting the minimum operating standards the exchange introduced in April 2014. This process, which is expected to extend through 2016, will ultimately result in the exit from the market of firms that are not able to meet the minimum standards.
Another example of closer monitoring by the exchanges can be found in FMDQ, which expanded oversight of banks in the OTC market. Beyond their customary banking services, banks were also trading bonds and equities on behalf of clients. Whereas banks are regulated by the Central Bank of Nigeria (CBN), rather than the SEC, there was essentially no oversight of this aspect of their business. To quickly remedy this situation, the SEC devolved regulatory power to FMDQ, allowing the exchange to register the banks as market players bound by the FMDQ’s rules. This move granted the SEC immediate oversight of a previously unmonitored market, while allowing more time for banks to formally register.
Both of the two primary exchanges in Nigeria, the NSE and FMDQ, have made technological advances a priority. One of the most notable developments is that the FMDQ is instituting an integrated and automated securities settlement system. While bonds are traded through the FMDQ platform, they are settled externally on two separate systems, one for corporate bonds and the other for public bonds. Trades executed through FMDQ and bilateral trades executed outside of FMDQ are manually reported to the appropriate system either by telephone or email. The planned automated system will eliminate human error in reporting data and eventually bring an end to off-the-books bilateral trading, forcing all bonds to be traded within a registered exchange and providing greater accuracy and visibility for investors.
The NSE also instituted a circuit breaker in January 2016. The circuit breaker will automatically halt trading if there is a 5% change in the price of the overall market in either direction, with a second break if there is further 5% change in the same direction. The purpose of this initiative is to maintain order, especially in volatile markets, and to allow time for new information to adequately filter through the system. This will work in conjunction with existing controls that limit price changes among some stocks.
In the hopes of attracting new investors and keeping pace with other major exchanges around the world, there are a number of new debt and equity products planned for 2016 and 2017. One of the biggest priorities is the need for a central counterparty clearing house, which facilitates clearing and settlement for derivatives. Both the FMDQ and the NSE, together with other key market operators, are working on developing a system, which is expected to be in place and operational in 2017. In its June 2016 Revised Guidelines for the Operation of the Nigerian Inter-Bank Foreign Exchange Market, the CBN allowed for the creation of FX futures that were non-standardised, non-deliverable and settled in the local currency.
Shortly thereafter, FMDQ launched the OTC FX Futures market. The FX futures market is governed by FMDQ, with regulatory oversight by the CBN. FMDQ maintains the trading platform and also manages the clearing and settlement procedures with the CBN’s Inter-Bank Settlement System. FX futures contracts are marked to market each day at 4.00pm, with the possibility for intra-day valuations during periods of high volatility. As of August 2016, open FX futures contracts were valued at $1.8bn.
In addition to derivatives, the exchanges are working to roll out more conventional products to help expand investment options. FMDQ, for example, is working on expanding the immediate and short-term bond offerings, including its recent standardisation of the corporate commercial paper (CP) market by issuing revised rules and quoting CP products on their platform in 2015. While the CBN first issued CP guidelines in 2009, there was no transparency in the market until FMDQ began offering the CP Quotation Service on its exchange in 2015. FMDQ has also announced plans to launch short-term bonds that will span the gap between CP and medium-term, three-year bonds. “FMDQ’s new short-term bond offering is aimed at bridging the funding gap which exists in the Nigerian fixed-income market and providing an option for issuers who require short-term funding with maturities of between one year to three years, i.e. between CPs with maximum tenors of 270 days and the traditional ‘medium- to long-term’ bond tenors (typically issued for three years and above),” Ugoji told OBG. FMDQ is working with the SEC to finalise rules around this new debt offering, which is expected to debut in the second half of 2016.
Brokers and banks are also in the midst of rolling out new products, such as the securities lending product introduced by Stanbic IBTC in December 2015. Securities lending, which involves the temporary transfer of a security from one party to another for a fee, is most commonly associated with short selling. With this first formal offering taking place three years after approval by the SEC, the prevalence of securities lending is expected to accelerate as other, already approved, securities lending agents introduce their products to the market.
In keeping with its focus on bringing more domestic and institutional investment into the Nigerian capital markets, the SEC is looking to the pension fund industry for support. The country’s pension funds manage N5trn ($15.8bn) in assets, nearly 70% of which is invested in federal bonds and Treasuries. A 2014 OECD survey of pension funds globally, which included three Nigerian funds, found that 52.1% of total pension fund assets were invested in fixed income and cash, with 31.5% invested in equity. In February 2016 the corresponding figures for Nigeria were approximately 85% and 12%, respectively, according to local daily BusinessDay. Pension funds are by nature conservative, but relative to their global peers, Nigerian pension investors may have the capacity to take on more risk in the form of equity and corporate fixed-income investments.
The SEC has announced its support for the development of Nigeria’s nascent non-interest finance industry, known elsewhere as Islamic finance. The government of Osun State, in the cocoa-producing region of the south-west, issued Nigeria’s first sukuk in October 2013. The N10bn ($31.6m) sukuk was issued with a maturity of seven years and a yield of 14.75%. Following Osun State’s lead, the federal government is laying the groundwork for a sovereign sukuk to catalyse the market. In January 2016 the SEC and the Debt Management Office agreed to partner on the issue of sukuk, with an expected release in 2017. The SEC is also working with PENCOM to finalise rules and guidelines that would allow pension funds to invest in the sukuk and future non-interest offerings (see analysis).
Although there are a handful of potential IPOs in the pipeline, 2016 may not be an active year for new listings, but capital markets, through rights offerings, corporate debt issues and other products will remain a key source of new capital for corporations. The next 12-18 months will see a host of new financial products designed to help corporations raise capital, hedge risk and speculate in various markets. These new products will certainly also arrive with a series of updated rules and regulations. If the regulators and exchanges can successfully educate investor community on these new products the capital markets of Nigeria could improve as a result.