Liquidity challenge hobbles small banks

A bag of toxic loans is causing growing distress among Nigeria’s second tier deposit money banks (DMB’s) as they grapple with liquidity and capital adequacy problems.

The rising challenge for the lower tier banks has created a sizeable opportunity for first tier institutions to dominate the fixed income and foreign exchange markets while many of the smaller lenders struggle to create loans as they fight for deposit liabilities.

For instance, Sterling Bank recently set aside 15 percent of its N16.7 billion operating income as impairments, which ballooned by 74.3 percent to N2.51 billion in the first quarter of 2017.
And while the bank’s deposits from customers dipped -2.5 percent to N570.2 billion during the period, its loan and advances to customers declined -0.2 percent to N467.4 billion. Sterling Bank had a year ago announced plans to raise N65 billion in tier 2 capital, but was only able to raise N7.9 billion in 2016 at 16.5 percent.
“The trend has been evident even in the way they trade. If you look at the fixed income financial market, you will see that it is only tier 1 banks that have the financial muscles to participate there. And they are ones engaging in more loan creation, because of the level of liquidity they have,” Andrew Esene, research analyst, Futureview Financial Services Ltd told BH in a telephone chat in Lagos.
He stated that for the state of the market most of the small banks would have rushed to the market to raise fresh fund to up their capital adequacy ratio (CaR) which has fallen below the 15 percent threshold set by the Central Bank of Nigeria.
Moses Ojo, Analyst with Pan African Capital Plc., told Business Hallmark in a telephone discussion that apart from the blow high non performing loans (NPLs) dealt on the liquidity of small banks, their woes was compounded by the effect of the implementation of the Treasury Single Account (TSA) by the Federal government.
“Since CBN released its financial stability report, which stated that some banks were not healthy, there have been sentiments against some of these tier2 and 3 banks. Customers seemed to be avoiding risky banks,” he further explained.
The result of the apex bank’s stress test conducted on banks operating in the country showed that seven commercial lenders, mostly tier 2 and tier 3 banks were operating below the statutory 15 percent CaR benchmark.
The CBN had last year sacked the management and board of Skye Bank for failing all statutory ratios, after which it injected N100 billion into the bank.
Skye Bank is yet to release its 2016 financial statement, while other lenders are set to reel out their half-year financials for 2017.
Wema Bank Plc could not realize plans to raise a dollar loan; it opted to sell naira debt in the local market, while Unity Bank Plc could not meet the February 28 deadline apex bank gave it to recapitalize.
Diamond Bank Plc which stated that its CaR was above 16.5 percent is presently in negotiations to sell businesses and issue debt over a year ago.
Union Bank has finalised plans to raise N50 billion in a Rights Issue before the end of the year and in the same vein, pan-African bank, Ecobank Transnational Inc. wants to sell five-year convertible bond this month to refinance debt and provide short-term bridge funding for non-performing loans at its Nigerian unit.to sell a $400 million, five-year convertible bond this month to refinance debt and provide short-term bridge funding for non-performing loans at its Nigerian unit.
Going forward analyst note that the fate of second tier banks lies delicately on the extent to which their managements succeed in raising need funds to improve liquidity.