Banks post strong performance in H1 2022 despite head winds
  • As CBN fx adjustment erodes capital base


The tough macroeconomic condition has started to rub off on deposit money banks (DMBs) as industry’s experts expect operators to start bracing up for another round of recapitalisation amidst weak balance sheet position. In dollar term, the required minimum capital base of N25 billion in the banking sector translates to $69.444 million due to more than 300% depreciation in Naira value.

For most Nigerian Banks with an international license, N50 billion capital base requirement, which is double the capital base amount, but not as comparably significant given the size of the economy with more than $400 billion estimated gross domestic products, GDP.

Analysts told BusinessHallmark that the recent adjustment in the foreign exchange market has impacted negatively the capital base of Nigerian banks in dollar terms.  Also, it was gathered that mid-size and smaller banks are expected to raise Tier-II capital to strengthen their capital position as quite a number of them are close to the regulatory edge.

Tighter regulation, foreign exchange conundrum, increasing exposure to oil and gas clients and on a larger scale, weak macroeconomics condition ushered in by the COVID-19 pandemic have to combine to wage war on banks survival.


BusinessHallmark recalled that the apex bank had stated the intention to recapitalise banks within the next five years.  After his reappointment as the Central Bank of Nigeria’s Governor, Mr Godwin Emefiele listed banking sector recapitalisation as a top agenda in his vision statement.

In a chat with BusinessHallmark, analysts expressed the view that the banking sector situation has been worsened with coronavirus on the street; which created the lockdowns followed by skeletal operations of companies. In a research note from LSintelligence – a research and data analytics firm – made it known that unless there are provisional clauses that cater for shocks, there are banks that have financial repayment obligations in the Eurobond market that will be adversely impacted by all this.

The firm explained that while debt forgiveness is easier for sovereigns, seeking the same at a commercial level, especially with private creditors, may lower credit rating and next Eurobond visits after the pandemic may not be easy. Experts maintain that many loans will be restructured but not in the usual commercial terms, but banks would more likely strive to ensure that credit assets do not turn bad completely.

“Issues facing banks are multiple. The CBN technical adjustment in the foreign exchange market has lowered the banking industry’s capital requirement. Banks’ exposures to Oil and Gas clients have increased, and these assets are not expected to enhance performance. So, we are talking about moving loans from one stage to another – minimum expected for average loans in the industry is to shift to stage-2.

“That would mean an uptick in impairment charges on credit losses across the board starting from the second quarter of the financial year 2020”, analysts explained.

Supporting analysts review, Agusto and Co predicted that the sector’s non-performing loans will hit the roof, as the rating agency estimated 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.

With the global oil price struggling to find a mid-point between excess supply and demand, experts have predicted that banks’ exposure to the industry has lowered the industry’s assets quality. Explaining further, the research analysts said that the dollar value of Nigerian banks capital has dropped massively.

“When CBN shifted official rate to N360 to a dollar from N306, balance sheet conversion has been affected by 18%. What this means is that capital position has dropped off by 18%”, analysts explained.

On cash reserve ratio stress on banks, BusinessHallmark 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 loan-to-deposit ratio implemented as additional CRR debits also contributed to the spike.

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, BusinessHallmark 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, BusinessHallmark estimated.

In the same tone, Agusto and Co stated in a report that heightens exposure to vulnerable industries threatens banks’ risk asset, thus we should expect operators to recapitalise in the short term to beat the rap.  According to Agusto, the banking industry’s assets quality is expected 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 (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 affect 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.

Also, Agusto said the capital base of banks has come under pressure owing to the IFRS 9 adoption and other asset quality issues that have resulted in major write-offs. Thus, tier II capital-raising activities heightened in the 2019 financial year up until the first quarter of 2020.

Agusto said based on the asset quality challenges and the naira devaluation, the firm envisages some strain on the industry’s capitalisation ratios in the near term.

However, this will be moderated by slower risk asset growth owing to the static business environment, increased profit retention, revaluation gains and the use of excess qualifying tier II capital to uphold capital adequacy ratios. Agusto expected the banking industry to recapitalise in the short to medium term, according to the report.

The Tier-I Banks are active players in the oil and gas sector, though, in their separate earnings calls with analysts, the bank had stated that some of their positions have been edged. Apart from that, banks explained that they are comfortable with downstream sector than upstream but the majority of the loan book in the exploration is significant.

Analysts stated that as at year-end, Guaranty Trust Bank oil and gas exposure has been strong recently based on analysis of loan book concentration. In its earnings call with analysts, the bank revealed that its oil and gas assets have been hedged for about 24 months.



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