By JULIUS ALAGBE
Some deposits money banks are expected to begin the process of shoring up their financials in the second half of the financial year 2019. It was learnt that average banking sector capital adequacy ratio for financial year 2018 settled at 17.05% which is just a little above the Central Bank of Nigeria, CBN threshold. Meanwhile, with the implementation of the international financial reporting standard nine (9) in the year, the need to raise additional capital would become unavoidable.
In its banking sector update, Vetiva Capital noted that CAR requirements would push banks to raise capital in 2019. The firm observed that average banking sector CAR for financial year 2018 was 17.05%, the level which was supported by a Tier I Banks’ average of 20.6% as against 16.6% for Tier II.
“We see scope for additional capital injections in 2019 and 2020 to help absorb effects from the implementation of IFRS 9. That said, the need to raise additional Tier I capital is becoming increasingly crucial given the limitations of Tier II capital in CBN’s ratio of total qualifying capital (max 25% for SIBs) and possible adverse impact on Tier I capital from expected credit losses (ECLs).
However, some banks have indicated interest towards adding up some amount to their regulatory capital. Although, in the recent time, both Access and Ecobank Transnational Incorporated have taken a different route to the market Access Bank Plc opted for liquidation of its $500 million Eurobond ahead of maturity, while Ecobank Group visited the Euro market where it raised subordinated debt capital totaled $500 million between April and May 2019.
Many equity analysts and Securities firms observed that the implementation of IFRS 9 by the CBN in 2018 was the key contributing factor to NPL reduction during the year, as the regulator alongside the commercial banks moved from a reactive to a proactive strategy in mitigating potential loan losses. By implication, the apex bank effectively moved from an Incurred Loss model to an Expected Credit Loss (ECL) accounting model, resulting in larger provisions for credit losses with implications for retained earnings and capital adequacy.
“We note that the improvement in asset quality due to IFRS 9 adoption can have negative effects on risk assets earnings and capital particularly for Tier I banks. Under the ECL model, any provisions on NPLs will reduce loan book in direct proportion with reductions in Interest Income and Retained Earnings, which in turn leads to a reduction in Net Asset growth”, Vetiva Capital noted in its update.
However, in Q4’18, the CBN introduced a four-year transitional arrangement to cushion the effect of the ECL implementation on banks’ core capital (equity). As observed across the industry, banks in the Tier II space have sought capital, predominantly from Tier I Capital, and the capital market to boost CAR ratios through the issuance of subordinated bonds and SPV structured bonds to meet ratings criteria for pricing and also qualify as regulatory capital.
More recently, Access Bank sealed a subordinated syndicated loan agreement totaling $162.5 million, qualifying as Tier II, from Dutch Development Bank “FMO”. This followed a capital injection of $64 million by ETI into its wholly owned subsidiary “Ecobank Nigeria” in December 2018.
Union Bank, First City Monument Bank Plc (FCMB) and a number of others have already signaled their intention to raise additional tier-II.
“The need to raise additional Tier I capital is becoming increasingly crucial given the limitations of Tier II capital in CBN’s ratio of total qualifying capital, capped at 25% for systemic important banks and possible adverse impact on Tier I capital from ECLs”, analysts said.
“We believe the current macro picture and market sentiment, with stock market all share index year to date loss at 4.27% as at 18 April 2019 as responsible for the low turnout of equity capital raises within the sector compared with debt capital access. Alternatively, banks could approach the CBN to apply for National as opposed to International licenses in order to enjoy lower Capital Adequacy Requirements, Vetiva Capital said”.
In their audited result for financial year 2018, Tier 1 capital bank reported strong capital adequacy ratio except for First Bank of Nigeria Holding that reported 15%. Guaranty Trust Bank Plc capital adequacy rested at 28%, and this happened to be the strongest in the industry at the time.
Both Zenith and Stanbic IBTC achieved 25% adequacy ratio followed closely by United Bank for Africa Plc that did 24%. Access Bank Plc audited result shows that the bank Capital adequacy ratio closed the financial year 2018 at 21% while FCMB did 16%.
Many banks were unable to pay dividend in the year due to regulatory demand for strong and stable capital outlook across the industry. Union Bank Plc last week followed up on equity reconstruction as the management at an EGM sought shareholders’ approval to move some N54 billion from share premium account to offset cumulative retain losses.
The intention which was targeted at enhancing dividend payment for shareholders was appropriately approved. Also, ETI didn’t make dividend payment in 2018 as the Group sought to restore poor performance in metrics and non-financial indicators.
It would be recalled that the CBN in January 2018 updated its policy on internal capital generation and dividend payout ratio for Nigerian banks. This policy placed restrictions on banks eligibility to pay dividends depending on their capital adequacy ratio, cash reserve ratio and non-performing loan ratio.