Banks Capital Unaffected by Naira Devaluation –Jibril Aku, Others
The capital position of Nigerian deposit money banks and other financial services operators under the Central Bank watch will be unaffected by the decision to float the naira, Jibril Aku, Chairman of Marathon Group told MarketForces Africa.
However, the former Ecobank chief swiftly added that any deposit money bank with a mismatch – if they have tier 2 capital in a foreign currency – will take a hit. There have been diverse views on the immediate impacts on local banks across Broadstreet over the decision to float the Nigerian naira as Africa’s largest economy seeks to unify multi-tiered exchange rates.
Some analysts have projected that banks’ capital will be impacted as Nigeria bite the bullets to float the local currency with a ‘willing buyers and sellers” transaction model.
Kasimu Garba, Managing Director, and Chief Executive Officer, APT Securities and Fund Limited told MarketForces Africa in a chat that the CBN directive to the Banks to trade US dollars according to market position is a welcome development.
In theory, devaluation challenges capital adequacy ratios (CAR) because the Naira equivalent value of risk-weighted assets (RWA) rises as these include foreign currency loans, CSL Stockbrokers Limited told investors in its commentary note released last week.
The investment firm said the weight of foreign currency loans in risk-weighted assets (RWAs) is moderate around 39%-45%, saying many banks will likely make windfall gains from net long FX positions. Analysts believe gains for foreign exchange revaluation will, instead boost Nigerian banks’ profits and capital positions.
With the worsening exchange rate, the MarketForces Africa report showed that the average value of Nigerian banks’ capital in dollar terms has plunged to a historical low – after the CBN announced immediate changes to the FX market.
The apex bank collapsed all segments into the Investors and Exporters (I&E) window, reintroduction of the ‘’willing buyer willing seller’’ model at the I&E window. Due to its ongoing reform, the monetary authority reintroduces two-way quotes with a bid-ask spread of N1.
The new model permits banks to process applications for medicals, school fees, and personal/business traveling allowance (PTA/BTA) but was silent on applicable rates. It announced a decision to end all previous incentives to drive FX inflow into the nation.
Specifically, CBN said the RT200 rebate scheme and the Naira4dollar remittance schemes will end on 30 June.
Garba, the CEO of APT Securities and Funds, who was instrumental to Femi Otedola’s acquisition of a majority share in FBN Holding agreed to the fact that the new FX policy will impact Banks’ earnings since they are free to trade according to market dictates.
For him, Nigerian banks’ second quarter (Q2) 2023 earnings results will be better because they will value according to the market rate.
Banks with significant net long FX positions will make windfall gains in the form of revaluation gains whenever there is a depreciation at the I&E window since the end of period reports are done using I&E window rates, CSL Stockbrokers said in its market brief.
On eurobond exposures, Aku’s response over banks that borrowed from the international debt market suggests there is still no cause for alarm.
“Banks that issued Eurobonds already have them issued on fixed prices and so little effect of price movement. The regulators already monitor banks to ensure they use the proceeds of Eurobonds for US dollar loans to their customers”.
Also, for any bank with a mismatch, where they raised Eurobonds to finance Naira assets, of course, the devaluation will make more it expensive to repay the US dollar loans, Aku said. Garba told MarketForces Africa he does not see pressures coming since most of the Eurobond taken by the Banks are being used it to give loans in Euro or US dollar currency.
He also noted that most of the Banks give oil companies loans in US dollars, saying local lenders have no problem with naira devaluation on their portfolios. On capital, he agreed that since Nigerian Banks’ capitalisation is in naira, there is no effect due to the devaluation of the naira, adding that banks may need not be recapitalised since most of their respective shareholders’ funds are ahead of minimum capitalisation.
Deposit money banks with national licences are required to maintain a capital adequacy ratio of 10.0%. Meanwhile, banks with international subsidiaries are required to maintain a 15% capital adequacy ratio. However, those categorised as systemically important banks must maintain a minimum capital ratio of 16.0%.
Ola Belgore, MD/CEO of Utica Capital said also the expected higher margins, especially for the downstream sector, should increase the company’s ability to settle their obligations.
Nonetheless, companies with exposure to foreign currency loan (FCY) loans will see their debt obligations increase. Thus, we expect higher loan loss provisions for banks with high foreign currency loan exposure to the oil, and gas sector.
“The outlook for the Eurobond instruments is positive. Specifically, the pro-market posture of the new administration sends a positive signal to both domestic and foreign investors.
“…we expect price appreciation on these instruments (as seen in recent days) which should bode well for banks with such exposure”. Utica Capital Chief explained that companies with foreign debt stock will see a significant jump in their debt obligations and finance costs which could suppress their margins and worsen leverage ratios.
He said the devalued Naira will result in higher risk-weighted assets for the banks – translation of their FCY-denominated assets. Equally, higher FX revaluation gains should support earnings. On a balance of factors, it raises recapitalization concerns for banks that have their capital adequacy ratio worryingly close to the prudential threshold and those with huge FX loan exposure. #Banks Capital Unaffected by Naira Devaluation –Jibril Aku, Others
