Tier-1 Banks Capital Still Healthy, Outstanding Eurobond Prints $1.3bn
Godwin Emefiele - CBN Governor

Tier-1 Banks Capital Still Healthy, Outstanding Eurobond Prints $1.3bn

Despite multiple pressures facing the economy, industry report on Nigerian banks by Fitch Ratings indicates that Nigerian big balance sheet lenders capitalisation remain relative healthy.

The banking sector has been facing whirlwind of pressure from the weak macroeconomic condition and the apex bank regulations not minding the damaging impacts of coronavirus on the industry’s fundamental.

Now, survival is key in the banking sector, as third quarter earnings result across the sector confirm things have deviated from the boom period.

In the report, Fitch recognised that most Nigerian banks entered the crisis with healthy capitalisation with Fitch Core capital (FCC) and regulatory capital adequacy ratios comparable with pre-2015 levels, thanks to strong internal capital generation.

However, Fitch said downside pressure on ratings could arise if asset quality was to deteriorate rapidly to a point where additional capital is required.

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“This scenario is currently unlikely”, the Ratings firm stated.

At the end of first half in 2020, the banks’ regulatory total capital adequacy ratios (CAR) were slightly dented by risk asset growth.

This was partly due to foreign currency risk weighted assets being inflated by naira devaluations, but most banks showed good buffers over regulatory minimums.

“We anticipate lower retained earnings for the full year to have a slightly more pronounced effect on capital adequacy ratios (CARs) but this may be offset by capital preservation measures such as lower dividend payments”, Fitch said.

It further provided that pressure on capitalisation could arise from a faster rise in the impaired loan ratio than in our baseline, or from aggressive loan growth to comply with the minimum LDR.

Lower Reliance on Foreign Currency Wholesale Funding

On the funding side, Fitch said banks benefit from sizeable, stable and low-cost local currency customer deposits.

It recognised that there is a low reliance on foreign currency wholesale funding (apart from Stanbic IBTC Holdings (SIBTCH).

Most of foreign currency funding is sourced from customer deposits.

The reports hinted that loan to deposit ratio (LDRs) are low, averaging 60% for the Fitch-rated banks.

In the period, the Ratings stated that customer deposits could grow in double digits annually given the underbanked population and inflows of foreign currency deposits from export-oriented industries (mainly the oil sector).

Since 2015, banks have rebalanced their loan books towards local and foreign currencies LDRs have declined.

This has reduced their vulnerabilities to foreign currencies refinancing risk and is credit positive.

“There have been no material foreign currency customer deposits outflows from banks since March.

“We expect outflows to remain limited, especially with the CBN’s capital controls”, the Ratings explained.

Positively, Nigerian banks are less reliant on foreign currency government deposits than in 2015-2016.

At the time, banks had to transfer these deposits to a Treasury Single Account, which had caused some foreign currency liquidity stress in the system.

“We expect foreign currency deposits to remain an important component of banks’ funding profiles despite the CBN’s new rules announced in December that require exporters to sell excess foreign currencies (held in banks accounts) in the I&E window”, Fitch said.

Additionally, the Ratings recognises the new rules included a requirement for remittances into Nigeria to be made through the banking system.

Given the significant size of these volumes, Fitch said banks will benefit from foreign currency liquidity, although they will likely be short-term in nature.

At the same time, the Ratings believes some customers will prefer to hold foreign currency deposits due to high inflation (eroding real returns in local currencies) and potentially benefit from a further devaluation of the naira.

It said banks are less reliant on dollar borrowing, given still healthy dollar customer deposit levels and the lower appetite for dollar lending.

This was demonstrated by the early redemption of USD1.8 billion Eurobonds in 2018-2019 amid weak demand and appetite for foreign currency lending.

Total outstanding Eurobonds amounted to USD1.3 billion at end-October 2020 (excluding USD393 million of Zenith’s 2022 USD500 million Eurobond repurchased by the bank), with USD1 billion maturing in 2022