Cover Story
Banks face fresh capital challenges
… CBN May intervene in Unity Bank
Okey Onyenweaku
Fears have emerged that Nigerian Banks may be heading for systemic distress, reflecting gross undercapitalisation. Local Deposit Money Bank’s (DMB’s)banks appear in dire need of fresh money to augment massively eroded capital bases.
A Dubai-based international investment bank, Arqaam Capital first raised the alarm and doubted the soundness of Nigeria’s banking industry after a stress test it conducted recently. The investment bank stated that seven banks were jointly undercapitalised to the tune of N1tn ($3.2bn).
It also reported that two other banks were close to insolvency. The investment bank argued that Nigeria’s banking industry, “is experiencing a full-blown financial crisis” as failed fiscal and monetary policies had led to a major credit crunch.
Arqaam explained that Unity Bank Plc and Skye Bank Plc were close to being insolvent, adding that lenders like FBN Holdings Plc and Sterling Bank Plc would require dilutive capital increases.
“Our acid test reveals seven under-capitalized banks” with a deficit of as much as 1 trillion naira ($3.2 billion) in the financial system, Meijer and Sleiman said.
After the stress test, the company expressed discomfort at the health conditions of the following banks namely, FBNH, Unity Bank, Diamond Bank, Skye Bank, FCMB Group, Sterling Bank and Fidelity Bank.
Financial analysts have explained that undercapitalization occurs when a bank does not have sufficient capital to conduct normal business operations and pay depositors. They add that this can occur when a bank is not generating enough cash flow or is unable to access forms of financing such as long term debt or equity.
Some of the analysts reckon that under-capitalisation may be caused by acquisition of Assets during recession at low costs. Also, there may be under-estimation of capital requirements of the bank by its Board. This may lead to capitalisation which is insufficient to conduct its operations.
Some investment pundits have argued that management of a bank may be highly efficient if they are able to run the business with minimal equity invested, but as lending business expands the paucity of equity could lead to challenges with the creation of income earning assets and result in a rush for costly local deposits or raising of equally risky foreign bonds.
Quite a few analysts have heaped the blame of the current capital adequacy debacle on rising non-performing loans which has crawled to twice the regulatory threshold of 5 per cent.
Nevertheless, the country’s chief financial regulator, the Central Bank of Nigeria (CBN) has insisted that no local bank is presently undercapitalised.
The director, Banking Supervision, Mrs. Tokunbo Martins, has already come to the defence of banks, saying that there was no truth in the Arqaam report.
Mrs. Martins who agreed that commercial banks were facing some challenges, noted that this was not peculiar to Nigeria, revealing that Non-Performing Loans (NPL) which stands at 11 per cent was not a major focus for now.
“As Director Banking Supervision, I wish to state that the report that seven banks are undercapitalised is not true.
“That our banks have non-performing loans at 11 per cent is not the focus for now. We should totally ignore such a story,’’ she explained.
The director said that commercial banks in the country had huge capacity to generate income to absorb any losses that could arise from such loans.
“The fact that a country has non-performing loans at this period is expected. So, I don’t think that any jurisdiction should be demonised because of NPL,’’ Martins said.
The CBN Financial Stability Report as at June 2016 had revealed that “Non-performing loans in the period under review grew by 158 per cent from N649.63 billion at end-December 2015, to N1.678 trillion at end-June 2016. The industry wide NPL ratio rose to 11.7 per cent from 5.3 per cent, thus exceeding the prudential limit of 5.0 per cent.
It also disclosed that at end-June 2016, loans to the oil and gas sector constituted 28.77 per cent of the total loan portfolio of the banking system as credit to that sector grew to N4.511trillion, compared with N3.307trillion at end-December 2015. Loans to State Governments also rose to N1,386.61 billion from N1,053.97 billion at end-December 2015, as declining revenues continued to constrain payment of salary by some states, funding of key services and execution of developmental projects.”
“The total exposure to the top 50 obligors stood at N5.23 trillion (33.4 per cent) of total industry credit exposure of N15.68 trillion,” and put, “Credit exposure to the dominant sectors as follows: 28.77 per cent to oil and gas sector; 12.95 per cent to manufacturing; 8.84 per cent to governments; and 8.69 per cent to general commerce.” The report also said.
Whereas the CBN is one of the authority vested with the powers to give report cards of the banks and the status of the financial system, analysts are beginning to have mixed feelings given the above painted scenario about the health of Nigerian Banks.
Industry watchers appear convinced that economic recession is a recipe for high non-performing loans in any economy. And some of them believe that the current fate of Skye Bank which has enjoyed the intervention of the CBN and Unity Bank which condition appear not to be better gives credence to the fact that Nigerian banks may not be as healthy after all.
They believe that it is not surprising that such reports which have some iota of truth in them are springing up, here and there.
Commenting on the issue, Dr. Afolabi Olowokere of Financial Derivatives Company limited, said it is known fact the low capital constitutes serious problem for financial institutions anywhere in the world.
‘’It is normal that the capitalisation of banks will be eroded at a time like this if you consider the huge non-performing loans which they have to provide for. I think the banks should not suffer any shocks because you know they have links with one another’’, he said.
Olowokere however, said since the CBN was not complaining people should take information from other sources with caution.
In his view, former President, Institute of Chartered Accountant, Mr. Chidi Ajaegbu told BH in a telephone interview that the report by Arqaam capital was a partial confidence on the banking industry.
He advised that the banks actually needed to recapitalise or reflate their capital base given the huge non-performing risk assets.
However, ‘’I don’t think we have an immediate systemic problem but something must be done to ensure that we do not slide into a systemic distress’’, said Ajaegbu
‘’It is not surprising to suspect that the banks may be going through some difficulties in a difficult time when loans default is very high. The banks are operating in the same economy where companies are folding up and borrowers are unable to service their loans or repay them’’, former Managing Director of the defunct ACB International, Mr. Emma Nwosu said.
However, some of the banks have come out strongly to refute the allegation that they are burdened with low capital. These banks including First Bank which said that its financial institution is not undercapitalised by any standards.
Similarly, Diamond Bank has reaffirmed that it is still a strong bank with a capital adequacy ratio within an acceptable band and non-performing loans well inside the regulatory threshold.
The jury still remains out on the financial status of local banks and their resilience will be determined more by the passage of time than by debates between anxious investment analysts and prickly financial regulators.
