….Analysts in divergent views
By Emeka Anaeto, Business Editor & Peter Egwuatu
A CONTROVERSY over capital adequacy amongst Nigerian banks may have ensued on the heels of claims by an international financial rating agency that most Nigerian banks are now undercapitalised following the persistent macroeconomic and currency challenges that characterized their operations since 2015.
Amidst mixed results in the full year 2016 and first quarter 2017 financial reports of banks turned in to the Nigerian Stock Exchange, NSE, world’s leading financial rating agency, Fitch Ratings, has indicated that the banks still have capital adequacy challenges.
The rating agency also indicated that for the full year ended December, 31 2016, most Nigerian banks under-provided for doubtful and substandard loans in other to remain within the regulatory capital adequacy ratio. But some Nigerian investment bankers would not agree with the global rating agency, saying the banks are in substantial compliance with the provisions of the Central Bank Of Nigeria’s Prudential Guidelines and regulations on loan loss provisioning.
In its verdict announced last week, Fitch said that while many of the banks failed to provide fully for bad loans, their earnings, especially tier-2 banks, were not strong enough to accommodate such full provision without going down below regulatory requirement for capital adequacy.
Fitch stated: “The latest round of results announced by Nigerian banks highlights capital weakness in the sector, with some mid-sized and small banks particularly vulnerable to deteriorating asset quality
“Headline capital adequacy ratios (CARs) are under severe pressure from inflated foreign-currency risk-weighted assets following last year’s devaluation of the Naira and increasing impaired loans as the economy struggles with lower oil prices.
“Several banks are not provisioning fully for their impaired loans, meaning that their underlying capital position is weaker than indicated by their CARs. Full provisioning would leave some banks close to the minimum regulatory requirement.
“We have analysed the sensitivity of selected banks’ CARs to 50% and 100% rises in their end-2016 impaired loans, assuming full provisioning. While most of the larger banks would still meet regulatory capital requirements, several others would fall short in one or both of the stresses.
“CARs have held up for most of the nine Fitch-rated Nigerian banks that have released 2016 results, helped by strong retained earnings on substantial revaluation gains and foreign-exchange trading income following the naira devaluation.
“However, we believe all banks’ ability to maintain CARs above the regulatory minimum will depend to a large extent on asset quality, which continues to face significant downward pressure given the highly volatile operating environment in Nigeria.”
Bankers, analysts disagree
But reacting to the claim of under-provision for bad loans, a financial analyst and head of research at FSDH Merchant Bank Limited, Mr Ayodele Akinwunmi told Vanguard that Nigerian banks have been compliant with the extant regulatory requirements on provision for bad loans.
He stated: “I think Nigerian banks make provision in line with the relevant regulations and the Central Bank of Nigeria, CBN, Prudential Guidelines. So it may not be appropriate to say that they underprovided.”
Also Managing Director of APT Securities & Funds Limited, a Lagos based investment house, echoed the views of Akinwunmi.
He stated: “I don’t believe in the view of Fitch, since our regulators such as NDIC (Nigerian Deposit Insurance Corporation) and CBN received banks’ reports and review their returns, particularly the NDIC that ensures that the depositors’ funds are protected.
“Probably Fitch is not aware of the restructuring that the CBN permitted banks to restructure with their clients. There were some Oil and Gas loans that CBN allowed for restructuringas in the case of Oando exposure to the banks and similarly to Etisalat which CBN discussed with the lenders.”
In his own comments on the Fitch Ratings verdict, Managing Director of Lambert Trust Limited, another Lagos based investment house, stated: “In providing for Non Performing Loans, NPLs Nigerian banks followed the CBN’s prudential guidelines So, I don’t believe they are under provided because the apex bank watches their financial reports.”
However, Mr Sewa Wusu, Head of Research and Investment Advisory at SCM Capital Limited, an arm of Sterling Bank Plc, took side with Fitch Ratings.
He stated: “I absolutely agree with the conclusion of Fitch Ratings. Before now most banks had actually taken huge provisions which have affected their profitability level and by extension the Capital Adequacy Ratio.
“I think it’s more appropriate to under-provide for bad loans at this time in order not to distort the regulatory threshold for Capital Adequacy Ratio (CAR).
“Most banks have to consider that measure to under-provide in order not to create another round of pressure on their CAR. The current environment is not really conducive to raise fresh capital, either through tier-1 or tier-2 capital. So most banks may not be able to bear such risk at this time.”
Explaining the circumstances of the some of the banks, Sola Oni, a stockbroker and managing director of Sofunix Investcom Limited, stated: “The regulatory provision for NPL (Non-performing Loans) is maximum of five per cent of the total loan. Sometime last year, it was revealed that many banks in Nigeria had exceeded to the point of over 12 per cent.
“Although the CBN admitted that few banks were able to be at the threshold of five per cent, the key issue is that macroeconomic headwinds have made it near impossible for any bank in Nigeria to operate NPL below five percent.
“Fitch Rating should weigh the appraisal of the Nigeria’s banking sector within the context of the structure of operating environment. Recession is an ill wind.”
Amidst the controversy Central Bank of Nigeria, CBN, has painted a mixed picture of the situation as at end 2016. According to the apex bank, key financial soundness indicators showed a decline in asset quality as the ratio of non-performing loans (NPLs) to gross loans deteriorated in the second half of 2016 by 2.3 percentage points, compared with the levels at end-June 2016.
In its Financial Stability Report for the second half of 2016, CBN stated: “Capital adequacy indicators declined marginally, but remained above the regulatory thresholds. A solvency stress test of the banking industry at end-December 2016 showed that the resilience of banks to moderate and severe shocks deteriorated marginally during the review period.
“Although the sector is more exposed to credit concentration and default risks, there were no significant systemic threats.
“The result of examinations conducted in the review period confirmed the resilience and soundness of banks in the face of daunting challenges. Other regulatory activities of the Bank included the issuance of a guideline on Recovery and Resolution Plans for domestic systemically important banks and the guidance notes on the implementation of IFRS 9.
Deterioration in asset quality
“Commercial banks in Nigeria experienced deterioration in assets quality at end-December 2016. The ratio of non-performing loans (NPLs) to gross loans deteriorated in the second half of 2016 by 2.3 and 8.7 percentage points to 14.0 per cent at end-December 2016 compared with the levels at end-June 2016 and end-December 2015, respectively. The deterioration in asset quality was largely attributed to the rising inflationary trend, negative GDP growth, and the depreciation of the naira.
“The ratio of regulatory capital to risk weighted assets decreased by 0.8 percentage point to 13.9 per cent at end-December 2016, compared to 14.7 per cent at end-June 2016. Similarly, the ratio of Tier-1 capital to risk weighted assets declined by 0.9 percentage point to 12.9 per cent at end December 2016 from 13.8 per cent at end-June 2016. Despite the marginal decrease, the ratios remained above the Basel minimum threshold.
“The ratio of non-performing loans net of provision to capital for the industry increased to 38.4 per cent at end-December 2016 from 28.4 per cent at end-June 2016.”