Half of Nigerian Banks face risk of going down, says Fitch

More than half of Nigerian banks risk going down should the Naira depreciates to N450/$, a recent stress test conducted by leading international financial surveillance agency, Fitch Ratings has indicated.

According to the report, tier 2 banks whose total assets are less than N2trn are more at risk as over 40 per cent of their assets and liabilities were denominated in the US dollar.

A statement released weekend showed that Fitch calculated the banks’ capacity based on end-September 2017 data to withstand a hypothetical severe naira depreciation to 450/dollar without breaching their minimum regulatory total capital adequacy ratios.

The agency was quick to aver that United Bank for Africa Plc, Zenith Bank Plc, Access Bank Plc, FBN Holdings, and Guaranty Trust Bank Plc are strong and would be able to withstand this scenario without breaching their minimum CAR requirements.

It was not clear if it was the fear of the discovery made by Fitch that had been causing the Central Bank of Nigeria (CBN), not to have conducted similar stress test it has been planning for so many years.

While the CBN had different minimum CARs for Nigerian banks: 16 per cent for those it considers to be systemically important, 15 per cent for those with international banking licences and 10 per cent for the rest, Fitch said the test shows increasing the risk-weight on FC loans to 130 per cent (from 100 per cent) to reflect extra difficulty for borrowers servicing FC loans with a weaker naira.

“We found that that the largest banks – Access Bank Plc, FBN Holdings, Guaranty Trust Bank Plc, United Bank for Africa Plc and Zenith Bank Plc – would be able to withstand this scenario without breaching their minimum CAR requirements. However, second-tier banks had mixed results.

Fitch confirmed that Nigerian banks’ move to a more market-based presentation of foreign-currency assets, liabilities and profit and loss items is likely to come into focus when they publish their 2017 results in the coming weeks.

According to the agency, financial statements with foreign currency items translated more in line with market exchange rates would give a more realistic representation of banks’ FC positions and capital at risk from potential further depreciation of the naira.

The agency averred further that the exchange-rate risk, warrants scrutiny for Nigerian banks because about 40 per cent of assets and liabilities in Nigeria’s banking sector are denominated in the dollars and not all banks operate with matched FC positions.

Fitch also argued that banks adopting the NiFEX rate remains “only a partial step towards using market exchange rates”, stressing that the IFRS guidelines say that companies operating in countries with multiple exchange rates should translate their FC assets and liabilities into local currency based on the exchange rates at which they expect to settle them.

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