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Nigerian Banks: Navigating stormy seas as NPL in FX threatens liquidity



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… Capital adequacy ratios under intense pressure


WITH the naira shelving about 40 per cent of its value following the liberalisation of FX markets on the 20th of June, 2016, and the subsequent jerking up of foreign exchange loans in commercial banks’ balance sheets, assets quality and Non-performing loans are in great danger.

National Daily gathered that with the prevailing economic downturn, it is going to be difficult for borrowers across major sectors of the economy to meet their obligations to banks, and this may result to a financial crisis in the banking sector.

Banks that have Non-performing Loans (NPLs) in hard currencies may see a negative NPL ratio and it is more worrisome if the provisions on loans are held in naira. The most susceptible to these uncertainties are Firstbank Nigeria Plc, Diamond and Skye, according to a report from Rencap.

For banks that have sizeable FX NPLs, depreciation could hurt their NPL ratios. Had they been holding the requisite provisions on these NPLs in naira, that would put significant pressure on their provisions and coverage ratios, as they need to set aside more naira to maintain coverage ratios at the pre-depreciation level,” Renaissance Capital analysts Adesoji Solanke and Olamipo Ogunsanya said in a June 27 note.

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“Based on feedback from management, FBNH and Diamond have the highest proportion of their NPL book in foreign currency, at 56% and 45-50%, respectively, with Diamond mentioning that it holds its provisions in naira. Overall, these sizable FX NPLs are a concern for us, but, unlike Diamond, FBNH has significant FX long positions that should help it to partly offset the impact of some of these asset quality challenges.”

The 10-member Nigerian Stock Exchange Banks Index has declined almost 6 percent since surging to a 9-month high on June 23. That compares with a 4 percent drop in the NSE All Share Index over the same period, with Sterling Bank Plc, Unity Bank Plc, Zenith Bank Plc and FBN Holdings Plc among the biggest losers.

“Nigerian banks have proven to be resilient over the years but we believe last some point they will require a bailout. Banks have taken huge provisions already in the last two years and have refinanced some of their loans. However, with their capital adequacy rations under intense pressure, they might have no choice but to sell some of their worst loans to AMCON,” the report stated.

The CBN’s decision to clear the N4.6bn backlog of FX demand at a rate of N280/$, took approximately N1.3trn out of the system. Its decision to sterilise the naira equivalent of the forward transactions was unexpected, and as such, a liquidity strain pushed the NIBOR overnight rate to as high as 120% during the week, although it has now moderated to sub-20%, aided by the opening of the CBN discount window.

According to financial experts, it is expected that rising interest rates will be net positive for the larger and more liquid banks, such as FBNH, GTBank, Access, UBA and Fidelity. Financial experts at Renaissance capitals said given the potential for the naira to weaken beyond NGN300/$, the net positive will be crucial in providing the banks with a capital and asset quality buffer.


Renaissance in its 2016 sector outlook report said where NPLs are in FX, this is negative for NPL ratios; and if the provisions on these are held in naira, it is even more worrisome.

“We have the most concerns on this front for FBNH, Diamond and Skye. Capital ratios could come under some pressure but we think investors should focus on the banks that are starting from a relatively strong base and have net long FX positions that provide ample buffers. Should a bank breach the minimum CAR requirements, we do not think based on our discussions with the banks that the CBN would do anything drastic beyond placing a freeze on credit growth, mandating the sell-down of some assets, capping or freezing dividends to help generate internal capital and requesting a capital improvement plan.”