Sharp Currency Swings Pose High Risk to Banks
Depreciating currency across emerging markets has been noted as a downside risk to banks’ operations, according to Moody’s Investors Service in a new report that covers 39 banking systems – including Nigerian banks.
The global rating firm hints that some emerging markets have acute macroeconomic weaknesses that could expose their banks to significant foreign exchange (FX) risks. It noted that structural constraints on currency flow also present FX risks to emerging market banks.
According to the rating agency, foreign exchange risk is high for Nigerian banks. A number of Nigerian banks have dollarized their balance sheet and recorded high loan concentration in the oil and gas sector.
Further naira devaluation could drag liquidity, asset quality and prudential capital lower, according to analysts. “Macroeconomic vulnerabilities are acute for banks in Armenia, Georgia, Kenya, Kyrgyz Republic, Mongolia and Uganda.
“These include cyclical factors such as the country’s current account balance, volumes of FX debt and size of FX reserves, which help to capture the FX needs and ability of a country and its banks to service FX obligations,” said Eugene Tarzimanov, a Moody’s Vice President and Senior Credit Officer.
In addition, structural factors such as the levels of FX-denominated deposits, type of currency regime, restrictions on capital flows and regulatory safeguards can facilitate or hinder banks’ access to hard currencies.
The report says FX-denominated deposits are very high in 15 banking systems in emerging markets, with significant restrictions on capital flows in 19 markets. READ: INTBREW: Loss-Making Streaks Pose Big Threat to Survival
“FX risk is very high for banks in seven countries: Belarus, El Salvador, Kyrgyz Republic, Nigeria, Tajikistan, Turkiye and Ukraine. Most of these countries have high levels of dollar deposits, high foreign-currency debt, weak FX reserves and/or restrictions on capital flows,” added Tarzimanov.
“Meanwhile, FX risk is lowest for banks in Chile, Cote d’Ivoire, Guatemala, Indonesia, Philippines and Vietnam.” The local currencies of many emerging markets have weakened against the dollar this year amid rising inflation, higher interest rates in the US, and country-specific economic challenges.
To assess this exposure to FX risks, Moody’s analysts said they identified 39 banking systems where FX deposits are 10% or more of total deposits.
The rating agency then assessed the FX risks to each of these banking systems via 2 broad criteria – structural and cyclical – and has identified which banking systems have overall very high, high, moderate and low FX-related risks. # Sharp Currency Swings Pose High Risk to Banks
