CBN’s FX Adjustment Put Banks Minimum Capital Base Below $70 million
The Central Bank of Nigeria’s recent foreign exchange, FX, adjustment has rubbed off on capital position of banks, as a result, experts are expecting capital raise for operators. The apex bank had recently raised the official foreign exchange rate from ₦305 to a dollar to ₦360, thus weakening capital in the dollar term by 18%.
In dollar terms, minimum regulatory capital of ₦25 billion is now worth less than $70 million in dollar terms. Meanwhile, at less than ₦100 to a dollar in 2004, a ₦25 billion capital requirement for lenders was more than $250 million.
Overall, banks have shed as much as $180 million from their capital requirement in 2005. In a report, Agusto and Co explained that the Nigerian banking industry will need to recapitalise in the short to medium term. According to Agusto, this becomes necessary due to asset quality challenges and naira devaluation.
Already, the CBN had placed strong restraints on lenders’ capital, leaving just 7.5% of the total deposits vault for marking up business opportunities. For most Nigerian Banks with an international license, a ₦50 billion capital base requirement is double the amount.
Given the size of the economy with more than $400 billion in estimated gross domestic products, the combined capital position of lenders is weak to support the economy. Supporting this view, analysts said the adjustment in the FX market has impacted the capital base of Nigerian banks in dollar terms.
In 2019, a number of operators raised Tier-II in order to strengthen their capital position as quite a number of them are close to the regulatory edge. Tighter regulation, FX conundrum, increasing exposure to oil and gas clients and on a larger scale, weak macroeconomics conditions are affecting banking sector performance.
MarketForces recalled that the apex bank had stated its intention to recapitalise banks within the next five years. Unveiling his agenda as the Central Bank of Nigeria’s Governor, Godwin Emefiele listed banking sector recapitalisation as a top agenda. However, Agusto and Co explained this will be challenging considering the current environment and weak investor sentiments.
“For banks that may be seeking to raise tier 1 capital, the weak valuations at this time – which has led to all the quoted banks trading at a discount to book values – may be a deterrent”, Agusto stated.
Analysts expressed that the banking sector situation has been worsening with coronavirus on the street; which was then followed by skeletal operations of companies. Foreign currency (FCY) exposure has also been heightened with the CBN adjustment, though banks booked gain, it may impact their FCY obligations.
A research note from LSintelligence Associates said unless otherwise there are provisional clauses that cater for shocks, there are banks that have financial repayment obligations in the Eurobond market.
The firm explained that while debt forgiveness is easier for sovereigns, seeking the same at the commercial level, especially with private creditors is not possible. Experts maintain that many loans will be restructured, but lenders would strive to ensure credit assets do not turn bad completely.
“Issues facing banks are multiple. The CBN technical adjustment in the foreign exchange market has lowered the banking industry’s capital requirement.
“Banks’ exposures to Oil and Gas clients have increased, and these assets are not expected to perform.
“So, we are talking about moving loans from one stage to another – minimum expected is for average loans in the industry is to shift to stage-2”.
“That would mean an uptick in impairment charges on credit losses across the board starting from the second quarter of the financial year 2020”, analysts explained.
In its report, Agusto predicted that the sector’s non-performing loans will hit the roof, as the rating agency estimated bad assets proportion to gross loans to be 13%. READ: Read Also: Agusto forecasts 13% NPL, says Banks exposures to vulnerable industries threaten assets quality
“Due to economic lockdown, banks have been offering moratorium to debtors. This moratorium has an intrinsic cost to the financial system”, Research analysts at LSintelligence stated in a report.
On cash reserve ratio stress on Banks, MarketForces gathered that the CBN non-refund policy is putting pressure on operators.
With official CRR sets at 27.5%, experts explained effective CRR is about 50% due to non-refund policy of the apex bank. Experts stated that penalties for breaching the minimum loans-to-deposit ratio implemented as additional CRR debits also contributed to the spike.
Banks to take sharp earnings cut as economy battles virus
Thus, restricted funds with the CBN account for as high as 15% of total assets and are non-earning. In February 2020, the CRR for merchant banks was raised to 27.5% from 2%.
For Banks, MarketForces Research revealed that the numbers are getting tighter.
CRR benched at 27.5% plus 65% LDR left Banks with 7.5% of their deposits to engage with the market effectively, MarketForces estimated.
In the same tone, Agusto and Co expressed that heighten exposure to vulnerable industries threaten Banks’ risk asset. According to Agusto, the banking industry’s assets quality flag due to weak macroeconomic conditions ushered in by coronavirus pandemic.
Agusto said that based on the asset quality challenges and the naira devaluation, the firm envisaged some strain on the industry’s capitalisation ratios in the near term.
“Although the degree of the impact will vary across different sectors, key sectors that will bear the brunt are oil and gas.
“That is, (upstream and services), real estate, construction, transportation (aviation) and manufacturing (non-essentials)”, Agusto explained.
Agusto stated that the Central Bank’s ability to defend the naira is threatened by lower foreign currency (FCY) revenues. This results in weaker macroeconomic indicators such as high inflation and currency depreciation and directly affect businesses and households, the rating firm noted.
The recent Organisation of Petroleum Exporting Countries (OPEC) quota adjustment – leading to a supply cut – is aimed at easing pressures from the oil supply side to some extent.
“We estimate an average crude oil price of $30-$35 per barrel, bearing in mind that in the first quarter of the year, crude oil averaged $55.9 per barrel.
“Secondly, an anticipated further devaluation of the naira will bloat the Industry’s foreign currency loan book, which is dominated by the oil and gas, manufacturing, general commerce and other import dependent sectors.
“This could weaken capitalisation ratios via higher risk-weighted assets and increase the level of delinquent FCY loans”, Agusto explained.
The Tier-I Banks are active players in the oil and gas sector, though in their separate earnings calls with analysts, the bank had stated that some of their positions have been hedged.
Apart from that, Banks explained that they are more comfortable with the downstream sector than the upstream but the majority of the loan book in the exploration are significant.
CBN’s FX Adjustment Put Banks Minimum Capital Base Below $70 million
