CBN’s FX Adjustment Put Banks Minimum Capital Base Below $70 million
The Central Bank of Nigeria recent foreign exchange, FX, adjustment has rub off on capital position of banks, as a result experts are expecting capital raise for operators.
The apex bank had recently raise official foreign exchange rate from ₦305 to a dollar to ₦360, thus weaken capital in dollar term by 18%.
In dollar terms, minimum regulatory capital of ₦25 billion now worth less than $70 million in dollar term.
Meanwhile, at less than ₦100 to a dollar in 2004, ₦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 Nigerian banking industry will need to recapitalise in the short to medium term.
According to Agusto, this becomes necessary due to asset quality challenge 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 international license, ₦50 billion capital base requirement double the amount.
Given the size of the economy with more than $400 billion estimated gross domestic products, capital position of lenders are weak to support the economy.
Supporting this view, analysts said the adjustment in the FX market has impacted 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 condition are affecting banking sector performance.
MarketForces recalled that the apex bank had stated 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 banking sector situation has been worsen with coronavirus on the street; which then follow by skeletal operations of companies.
Foreign currency (FCY) exposure has also been heighten with the CBN adjustment, though banks booked gain, it may impacts their FCY obligations.
In a research note from LSintelligence Associates said unless otherwise there is a 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 sovereign, seeking the same at commercial level, especially with private creditors is not possible.
Experts maintain that many loans will be restructure, 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 have lowered banking industry’s capital requirement.
“Banks’ exposures to Oil and Gas clients have increased, and these assets are not expected to performance.
“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 board starting from the second quarter of 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 estimate bad assets proportion to gross loans to 13%.
“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 to flag due to weak macroeconomic condition ushered in by coronavirus pandemic.
Agusto said 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 affects businesses and households, the rating firm noted.
The recent Organisation of Petroleum Exporting Countries (OPEC) quota adjustment – leading to supply cut – are 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 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 comfortable with downstream sector than upstream but majority of the loan book in the exploration are significantly.
CBN’s FX Adjustment Put Banks Minimum Capital Base Below $70 million
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source https://dmarketforces.com/cbns-fx-adjustment-put-banks-minimum-capital-base-below-70-million/