Few Banks Capital Ratios to Fall Below 10% – Peter Amangbo, Globus Bank Chairman
On account of expected revaluation gains, a number of deposit money banks will see increased profitability in financial 2023 following the Central Bank of Nigeria’s (CBN) decision to liberalise its exchange rate policy.
The apex bank has continued to ring-fence some local lenders with weak capital adequacy to prevent banking shock. Some banks are due for capital raise in the year following the early morning rush to market in the year witnessed in 2023.
Banks with positive net foreign currency positions, majorly Tier-1 lenders, have been projected to see increased profitability in the second quarter and perhaps down the year.
According to a market update from multi-asset investment banking firm, CardinalStone Partner Limited, Access, GTCO, Zenith Bank, and United Bank for Africa are strongly positioned to see higher trading gains following the large naira devaluation by the apex bank.
For all banks, the decision to float the local currency is expected to have impacts on asset quality as loan books adjust to market rates, and their respective balance sheet sizes are also expected to rise as local lenders convert the liabilities and assets.
Peter Amango, Chairman of Globus Bank Limited (former Chief Executive Officer, Zenith Bank) however sees mixed impacts on capital, non-performing loans, and balance sheet sizes among others as the apex bank switched to managed float foreign exchange policy.
“I see capital adequacy ratio of few banks dropping below regulator’s 10% minimum requirement”, Amangbo told MarketForces Africa in a chat. Emphatically, Amangbo told MarketForces Africa that the “willing sellers and willing buyers” foreign exchange model will affect local lenders’ capital adequacy ratios on a different scale.
To balance up with regulatory requirements and enhance business capabilities, some deposit money banks raised capital earlier in the year while a number of others plan capital raise for the second half.
Uncertainties in the economy and serial debit on banks for failing to meet the Central Bank of Nigeria loan-to-deposit ratio have been one of the tough challenges facing local lenders, resulting in weak capital position and strained liquidity.
For Broadstreet analysts, the reform is a welcome development due to the sustained scarcity of foreign currency in the economy. Banks with strong net fx positions are noted to be the major beneficiaries.
Nigeria had maintained no devaluation stance despite a call to adopt a market clearing rate to unify its multitiered rates. The immediate past government rode on pro-people sentiment had remained unfazed even in the absence of noticeable foreign currency inflow into the economy.
Ex-president Mohammadu Buhari would have seen such devaluation as an indictment on his administration, according to a number of experts who spoke with MarketForces Africa. However, the CBN made a U-turn after President Bola Tinubu’s inaugural speech. The implementation of its managed float exchange rate came after the suspension of Godwin Emefiele as CBN governor.
Amagbo said deposit money banks with exposures to foreign currency loans will be negatively impacted as they have to translate their United States dollar denominated loan balances at a higher exchange rate.
He said lenders that have large foreign currency exposures to Oil & Gas, Power, and other sectors will see their loan balances increase significantly. Nigerian banks that have non-performing loans will require higher levels of provisions in their books, saying this will put pressure on their income for 2023 year-end, he added.
To Amangbo, all the Nigerian banks will also be affected as the import finance facilities given to their customers will also be translated at a higher exchange rate, hence their loan balances will also go up. He said by implication, the increased loans book in naira term after conversion will negatively impact the capital adequacy ratio requirement.
“I see the capital adequacy ratio of a few banks dropping below the statutory 10%, therefore requiring to raise additional capital”, Globus bank chairman said. On a positive note, Amangbo said the income earned by banks will also go up. This will mainly affect commissions on Letters of credit, Fx, etc.
He said for banks with Eurobond exposures, the impact will be similar to that of banks having foreign currency denominated loans since the Eurobond investments will have to be translated at a higher exchange rate. The losses arising from mark-to-market will also increase.
Globus Bank Chairman said that almost all companies that have import finance facilities from banks have exposures in US dollars since the facilities are denominated in foreign currency.
“…what these customers and banks will desire is a stable exchange rate and not whether it is low or high”. For banks’ capital, higher loan volume implies a higher capital charge, he said while establishing the connection between devalued naira and local lenders’ capital records.
“…some banks will require more capital, but the improved profitability will help mitigate the devaluation’s impact on their funding profile”.
Banks with non-performing foreign currency loans will be most affected, Amangbo said, adding that the same thing will happen to those with marginal capital adequacy ratio.
Overall, Banks’ balance sheets will balloon due to the increase in loan balances arising from the translation of Fx exposures using a higher exchange rate. The surge, however, will hit Capital adequacy and provisions for non-performing foreign currency loans will also be negatively impacted, Amagbo, Globus Bank Chairman said. #Few Banks Capital Ratios to Fall Below 10% – Peter Amangbo, Globus Bank Chairman
