Banks to Wind Down FCY Loans, Capital to Slide–S&P
Yemi Cardoso, CBN Gov
  • DMBs to Reduce FCY Loans
  • CBN to Raise Capital Base
  • Banks’ Earnings to Reduce

The sharp devaluation of the Nigerian naira will impact deposit money banks’ (DMBs) capital position in the first quarter of 2024, S&P Global said in its latest rating note. With the new FX guideline, the rating firm predicts that DMBs will start to wind down their foreign currency loans to further reduce risks.

The Central Bank of Nigeria (CBN) asked banks to sell down their foreign currency holdings as authorities seek to upturn the fortune of the naira, its weak local currency. The naira has been on a decline over the years due to poor economic policies and overdependent on imported goods.

FX inflow has been limited as a result of uncertainties which kept foreign investors away from the financial markets. Foreign investors have been unable to get their funds out as ex-CBN Governor Godwin Emefiele implemented strong capital control throughout his tenure.

Banks were record large gains supported by FX revaluation as the local currency nosedived persistently before the new sheriff came to town, asking for 24 hours sell down. “We estimate that foreign currency-denominated loans will average 55% of system loans in 2024, up from about 40% before June 2023”, S&P global ratings said in a note.

Furthermore, the ratings firm anticipates that the banking sector’s external asset position will likely moderate following the CBN’s guidance to banks to reduce to 0% of shareholders’ equity, their net long position while external liabilities could rise.

Analysts noted banks had 24 hours to reduce their excess foreign currency assets to abide by the new net open position (NOP) limits. …sharp naira depreciation at end-January will affect banks’ capital adequacy ratio in first-quarter 2024 because of increased risk-weighted assets, S&P said in the rating note.

“It is unclear whether the CBN will grant banks some grace period to comply with the new NOP limits and the minimum regulatory capital ratio. We also understand that the CBN is likely to announce an increase in banks’ capital in 2024.

“We expect these changes will affect loan growth in 2024, and lead banks to wind down their foreign currency loans”. Nigerian lenders recorded large trading revaluation gains in 2023 because of their long net open positions. S&P Global anticipates banks’ earnings will moderate from 2023 levels because of the changes. Banks Face Risks over 24hrs FX Positions Sell Down

It said the financial sector is vulnerable to investor sentiment as U.S. dollar scarcity persists and the country remains on the Financial Action Task Force’s grey list, though it noted progress has been made addressing technical compliance deficiencies.

Overall, pressure on asset quality will persist amid high inflation and interest rates. S&P Global estimates that the credit loss ratio will be about 3.5% for 2023, and remain elevated in 2024 at about 2%-3%. That said, the naira depreciation leads to inflated gross loans, which will result in the nonperforming loan ratio remaining below the 5.0% regulatory limit.

#Banks to Wind Down FCY Loans, Capital to Slide–S&P