BMI Research, a Fitch company, has indicated that Nigerian smaller banks are on top of risk watch on growing non-performing loans (NPL) in the industry.
In a recent Nigeria Commercial Banking Report, its analysts say NPLs threaten capital adequacy ratio (CARs) in the smaller banks, adding that a stress test by the CBN released in April found seven deposit money banks having CARs lower than the required threshold of 10 percent to 15 percent, depending on size.
The outcome of the stress did make a series of banks coming out publicly to state that they were stable, with analysts recommending half-yearly stress to curb anxiety on health status of banks.
BMI analysts said given that the economy is improving, it is only the smaller banks, which seemingly have any issues, and that they are confident that the banking sector will remain resilient in 2017, and that a repeat of the 2009 crisis is off the cards.
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The CBN indeed put in a series of measures regarding capital ratios following the banking crisis, which makes the sector far more stable than it was previously. However, another shock to the oil sector in the form of further pipeline attacks or structurally lower prices would notably increase these risks.
“The Nigerian banking sector is well regulated following a series of new legislation introduced in the wake of the 2009 crisis. As such, we view Nigerian banking as broadly stable over the coming years, despite the challenging headwinds buffeting the sector at present,” they insisted, adding that increasing penetration within the unbanked and the rise of mobile banking offer some tailwinds to growth.
“Despite our expectation for a deterioration in asset quality in the coming months, we do not envisage a major crisis in the sector. The banks have, for the most part, manageable (albeit rising) levels of non-performing loans (NPLs) and healthy capital adequacy ratios (CARs). At Zenith, one of the country’s largest banks, the CAR was at 19.0% in October 2016,” the report indicated.
Similarly, FirstBank’s CAR, according to the analysts, is at 18.9%, well above the 10.0% mandated by the CBN for banks of that size
However, the report stated that given that about a quarter of total loans are concentrated in the oil sector, it expects NPLS to continue to rise in 2017.
“Given that about one-quarter of total loans are concentrated in the oil sector, we expect NPLs will continue to rise in 2017, but contend they will remain manageable. All sectors are vulnerable given the general macroeconomic malaise, but oil in particular will be a source of stress. In H217, as the economy improves, and oil prices and production pick up, we expect NPLs will begin to fall once more.”
The report indicated that about 45 percent of total loans in the sector are denominated in foreign currency, and that Nigeria is one of the largest importers of dollars in the world. It noted that dollarisation grew from 15 percent of deposits in 2011 to 23 percent by 2014 as the dollar has been used as a medium of exchange or currency substitution and as store of value or asset substitute.
Indeed CBN directives on dollarization have been focused on the dollar being used for transactions or as a medium of exchange, while its macro-prudential guidelines are focused on limiting foreign currency exposure by banks, including limiting foreign currency borrowing from 200 percent to 75 percent of shareholders’ funds, and banning the issuing of invoices in dollars for domestic services.
Most banks have FX hedge positions, which protect them from the negative effects of the rapid naira depreciation.
On sovereign support capacity, BMI said in the past, the CBN has shown high levels of willingness and ability to extend emergency lines of credit to banks, suggesting a robust sovereign backstop for the industry.
It noted that in 2008-2009, the global economic crisis triggered a banking crisis in Nigeria and the CBN took forceful measures to support the industry, injecting N620 billion of liquidity, putting out a blanket guarantee on deposits and foreign credit lines and replacing management in eight banks. The Asset Management Corporation of Nigeria (AMCON) was established as a vehicle to purchase NPLs from banks.
However, the Nigerian government and the CBN have increasingly limited capacity to support lenders in the event of a financial crisis. The fall in the oil price has squeezed government revenues, leading Nigeria’s fiscal deficit to expand – from 1.2 percent of GDP in 2014, to 2.0 percent in 2015 and 3.0 percent in 2016 – and reserves have been falling.
In September 2014, AMCON announced it was no longer purchasing NPLs from banks.
Frontpage December 2, 2019