FX Gains Support Banks' Solvency Post-Devaluation -Fitch

FX Gains Support Banks’ Solvency Post-Devaluation -Fitch

Nigerian banks’ balance-sheet structures have helped to ensure continued compliance with minimum capital requirements despite the devaluation of the Nigerian naira by about 40% since June 2023, Fitch Ratings says.

According to the rating agency, the risks to capital from further currency devaluation and loan quality pressures should not affect ratings for most of the Nigerian banks. However, it noted that the Rating Watch Negatives (RWNs) on the three banks most at risk of breaching minimum total capital adequacy ratio (CAR) requirements remain in place given these risks.

It listed the banks to include Coronation Merchant Bank, Ecobank and FCMB.  According to the update, the sharp devaluation of the official exchange rate led to large FX revaluation gains in 1H-2023 due to banks’ long net open positions in foreign currency (FC).

It said FC risk-weighted asset inflation was limited by small FC loan books and low risk-weights on non-loan FC assets, helping banks to remain compliant with CAR requirements.

Fitch explained that loan impairment charges increased significantly in 1H-2023 due to the weaker macroeconomic setting and the increased provisions needed for FC loans, but they were comfortably absorbed by the FX revaluation gains.

“Banks with foreign subsidiaries, in particular United Bank for Africa, also experienced large FC translation gains through other comprehensive income, while the CARs of banks with FC-denominated capital-qualifying debt instruments, notably Access Bank, benefitted from these instruments inflating in naira terms”.

The ratings agency further said that several banks have had their interim financials audited so that they can incorporate their interim profits into regulatory capital. FBN Holdings, Fidelity Bank, Wema Bank and Jaiz Bank plan to raise core capital to strengthen buffers over CAR requirements, according to the note.

In its commentary, Fitch said there has been a renewed divergence between the parallel market and official exchange rates since August due to the limited supply of FC, reversing some of the narrowing at June’s devaluation.

This highlights the challenges in sustaining exchange-rate liberalisation and raises the possibility of a further devaluation, it added. The Central Bank of Nigeria recently provided some light regulatory forbearance for breaches of single-obligor and net open position limits.

Fitch said the CBN has not signalled any forbearance for minimum capital requirements, which may suggest it believes banks will largely remain compliant. However, it said the CBN has instructed banks to retain their large FX gains rather than to distribute them as dividends, which will provide a cushion to absorb further currency devaluation and loan quality risks.

The banks on RWN are Coronation Merchant Bank (CMB), Ecobank Nigeria (ENG) and First City Monument Bank (FCMB), all rated ‘B-’. ENG and FCMB have narrowly remained compliant with CAR requirements since the devaluation.

Fitch estimates that CMB has breached its CAR requirement, but that the bank’s rights issue, expected to conclude this month, will restore compliance. All other Nigerian bank ratings have Stable Outlooks reflecting that the risks from a potential further currency devaluation are captured in the existing ratings. NAICOM, FG Plan Guidelines to Insure Govt. Assets