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Capital adequacy ratio of 5 banks falls below 10% requirement

By on May 5, 2015

The Capital Adequacy Ratio (CAR) of five deposit money banks (DMBs) were less than 10 percent required minimum, while 16 banks rose above it in December 2014, according to the Central Bank of Nigeria (CBN).

CAR, also known as Capital to Risk (weighted) Assets Ratio (CRAR), is a ratio of a bank’s capital to its risk. Regulators track a bank’s CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory capital requirements.

The names of the banks were not mentioned but classified as small banks in the Financial Stability Report for the month of December 2014 released by the CBN on Thursday.

According to the report, the banking industry, as well as large and medium banks were resilient to credit risk, as the impact of the most severe shock of a 200 percent NPL increase resulted in their CARs remaining above the 10 percent required minimum (13.72%, 14.94% and 11.19% for the banking industry, large and medium banks, respectively).

The small banks, however, showed significant vulnerability to the shock of a 200 percent NPL increase as their CAR fell to 8.85 percent. Under this scenario, 16 banks maintained CARs above 10%, while 5 had CARs ≤10% but ≥5%. Furthermore, one bank had CAR <5% but ≥0% and one other bank had CAR<0%.

Under the scenario of “Five biggest corporate obligors”, credit facilities shifting from performing to sub-standard (10% provision) and “from sub-standard to doubtful (50% provision)”, the banking industry and all peered banks showed significant resilience to credit concentration risk as their CARs remained above 10 percent, except the small banks, whose CAR fell to 8.33 percent.

However, when their facilities shifted to lost (100% provision), the CARs of the banking industry, large, medium and small banks fell below the regulatory threshold of 10 percent to 6.72, 7.20, 6.92 and 2.15 percent, respectively.

The report stated that liquidity risk in the banking industry was adjudged mild as the impact of the most severe shock, a 15 percent withdrawal of 20 largest deposits, resulted in the liquidity ratio falling by 2.29 percentage points, from 45.77 percent to 43.48

Kasimu Garba Kurf, managing director/chief executive officer, APT Securities and Funds Limited, said, “The market needs to do a lot of work on issuers (companies) to have access to their information. This market is information driven.” Emeka Madubuike, managing director, Compass Securities Limited, said, “NASD needs to go back to SEC and ask for all the companies that did private placements in the market to increase the number of tradable securities in this market.”percent.

Similarly, under the same shock scenario, large, medium and small banks exhibited the same trajectory as their liquidity ratio dropped to 41.35 percent, 49.53 percent and 47.10 percent from 43.44 percent, 52.86 percent and 50.51 percent, respectively. The banking industry and the peered banks were, therefore, resilient to liquidity risk, indicating relatively diverse sources of funding.

Meanwhile, Net Domestic Credit (NDC) grew by 10.97 percent to N16.129 trillion at end December 2014, compared with N15.008 trillion at the end of the preceding half year. This reflected a 12.08 percent growth in claims on the private sector (CP), which more than offset the 21.81 percent fall in claims on the Federal Government.

 

[Business Day]

One Comment

  1. onuigbo

    May 5, 2015 at 3:24 pm

    Then this write up is dead. How on earth can a newspaper that is supposed to be informative turns out to be peddling hear-say, publishing speculative journalism. Of what value is this article? What do you want a reader to get out this? Protecting the banks that did not meet the basic requirements is not what newspapers were established to do.