By Emeka Anaeto,
Nigeria’s latest economy profile may have thrown up more challenges for the nation’s banks, the key economy intermediation sector.
Reports from the National Bureau of Statistics, NBS, last week show that economic conditions have worsened on all fronts including inflation, gross domestic product, GDP, capital importation, employement/ unemployment amongts others.
In a review of the implication of the adverse statistics, chief economist at FSDH Merchant Bank Limited, Mr Ayodele Akinwunmi, told Sunday Vanguard that the rising inflation means that banks will have to reprice the interest rate on the risk assets to enable them improve profit.
Though this would mean further increases in cost of goods and general price levels in the economy Akinwunmi indicated that the banks themselves would find it difficult to increase lending.
He stated: ‘’Unfortunately, the weak economy will also not allow banks to increase risk assets (loans), meaning that the profitability will drop in the short term.
According to him, the banks will continue to play heavily in the fix income securities of buying government bonds rather than putting their money into real economic activities, adding that this would be their strategy for the next few weeks.
He also stated that ‘’we may also see increases in non-performing loans which will increase provisioning (for bad loans) and lower profitability’’.
Forex worries increases
Foreign exchange (forex) market had reacted to the economy statistics with sharp depreciation of the local currency, Naira, against major international currencies. Consequently, the interbank foreign exchange market results for the month of August and week ended last weekend appear to be putting the banking industry under pressure over capital adequacy.
The week’s average exchange rate was N313/ USD1, a significant up-tick against N308 previous week.
But the major concern was that the decline came within a week of highest inflow of forex from independent sources since the commencement of the liberal forex market and floating exchange rate regime.
Banks’ forex dealers, however, said that in addition to the scarcity of forex, the other major pressure points include developments in the parallel market where last week’s average rate hit an all time high of N420/ USD1, creating a parallel market premium of over 34.2 per cent.
They feared the premium, despite the new regime, was widening uncontrollably while creating a sentiment of real market.
Moreover, many dealers indicated that a narrowing would be in favour of the parallel, rather than interbank rate.
In the event of this happening, the dealers believe this would trigger another round of pressure on banks’ Capital Adequacy Ratio (CAR).
CAR is one of the core determinant of bank’s state of health, measuring the ability of a bank to withstand stress arising from credit risks.
The banking industry financial reports for first half 2016 (H1’16) just rounded up with indications last week that tension generated by forex risk may be far from over following continued pressure on forex supply and exchange rate.
From the forex market report at close of business weekend about 12 banks were below the stipulated CAR of 15 per cent set by the Central Bank of Nigeria (CBN).
Industry analysts said if this trend continues the banks would be forced to recapitalize or the apex bank would be forced to review its CAR downwards to around 10 per cent to keep about 11 banks away from distress threshold, since recapitalization would equally be difficult given Nigeria’s tight economic and monetary conditions.
But industry analysts are worried that the situation is worse than the position last weekend because trading trend in the past one month actually indicated that pressures on exchange rate could drive more banks below the minimum CAR.
Specifically, with exchange rate peaking at N351/ USD1 in the month of August only four banks were within the stipulated minimum CAR. The valuations were done on foreign currency loans as percentage of total loans as at end H1’16 for all the banks and first quarter positions for United Bank for Africa (UBA) and Guaranty Trust Bank (GTB).
Reacting to this development, financial analysts at CardinalStone Partners Limited, a Lagos based investment house, stated: “We believe the continuous depreciation of the Naira will lead to material capital erosion in the banking sector and this will adversely affect the health of the financial system”.
As at last weekend almost all the banks have reported their H1’16 financial results booking losses or gains from foreign currency assets and liabilities in line with the 42% devaluation of the Naira in June 2016.
Consequently about four banks (First Bank, GTB, Diamond Bank and FCMB) reported forex revaluation gains while three booked forex revaluation losses.
Seven banks reported declines in CAR in H1’16 following the devaluation of the Naira. Access and GTBank were exceptions as they reported marginal improvements in CAR.
Zenith Bank which has the highest shareholders’ funds in the banking sector was materially affected in H1’16 as it reported a 200 basis points drop in CAR from its financial year 2015 position.
Despite the huge forex revaluation gains of N61 billion booked by GTB and the 45% rise in the bank’s H1’16 earnings, it’s CAR improved only slightly from Q1’16 position as H1’16 CAR was 18.25% compared to Q1’16 position of 18.16%.
Commenting on this CardinalStone analysts stated: “For GTB, we surmise the increase in capital from forex revaluation gains almost netted out the increase in risk weighted assets (Naira equivalence of forex loans).
“With the current level of volatility in the forex interbank market