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Nigerian Banks have strong capital buffers – CBN insists

By on October 14, 2016

The Central Bank of Nigeria (CBN) wednesday allayed concerns over the soundness of Nigerian banks, assuring the public that they are sound and have strong capital buffers.

This is just as Fitch, an international ratings agency, acknowledged that banks in the country had experienced a sharp rise in non-performing loans (NPLs), adding that other key concerns in the banking industry include forex scarcity, weakening capital adequacy ratios, and the sovereign’s ability to support banks, given its weaker financial flexibility.

“If current challenges do not ease, the banks could face further downgrades,” Fitch said.

The central bank, which was reacting to a recent report by Arqaam Capital, a Dubai-based investment company, that said some banks were close to being insolvent, stated that the assertion was false.

The CBN, however, admitted that just like in other oil and commodity-dependent economies, banks in the country were also feeling the headwinds in the economy.

The Director, Banking Supervision, CBN, Mrs. Tokunbo Martins, said this while responding to a question at the end of the Bankers’ Committee meeting held in Lagos yesterday.

Martins stressed that to say “seven banks are undercapitalised is absolutely not true”.

She added: “That is not to say that the banking sector is not feeling the economic headwinds, they are. Just like every other jurisdiction. It is not strange.

“Non-performing loans (NPLs) at 11 per cent is not what we need to focus on. What we need to focus on is if the banks have the capacity to absorb losses that may arise from those NPLs? And the answer is yes. They have very strong capital buffers.

“Another thing that is important is that Nigerian banks have very huge capacity to generate income to also absorb those losses, if they do arise. And then the loans that are non-performing, can they re-perform? Yes they will because the underlying assets are still there and they are good.

“The fact that the country has NPLs at a period like this should be expected and is not a thing that any jurisdiction should be demonised about.

“Other jurisdictions going through what we are also going through are experiencing the same thing. There are countries that have NPLs as high as 15 per cent, some 30 per cent, and some countries in Europe have NPLs as high as 80 per cent.”

Earlier, Martins said the Bankers’ Committee discussed issues pertaining to the downsizing of workers in the industry. According to her, news of mass retrenchment in the industry was not true.

“Another thing that we discussed was the rule that was put in place that customers are not allowed to withdraw more than $50,000 on their naira debit card per annum.

“For a while, some have been breaching that rule. But we have decided that it is now time for us to take action. If people continue to breach that rule, they may lose that money and may be exempted from the forex market entirely,” she said.

The chief executive of Skye Bank, Mr. Tokunbo Abiru, said the meeting also discussed issues around financial literacy.

Part of the resolution was that banks would play an active role during the World Savings Day celebration coming up this month, he said.

Each bank is meant to take up at least two public schools in each geo-political zone in the country, which comes to 12 public schools to be taken up by one bank.

“We would be educating the students on general commerce, manufacturing, and banking and finance,” he added.

On her part, the Deputy Managing Director of Guaranty Trust Bank Plc, Mrs. Cathy Echeozo, further disclosed that prior to the meeting, bank CEOs and top CBN officials met with a team from the Manufacturers Association of Nigeria (MAN).

According to Echeozo, the meeting focused on improving access to forex by manufacturers.

“We met to discuss how to improve the supply of forex to manufacturers so that they can continue to produce and not lay off workers. It was a very fruitful meeting and we are very positive that the outcome will be beneficial to the economy,” she explained.

Also, the chief executive of Stanbic IBTC Bank, Mr. Yinka Sanni, said the bank CEOs agreed to continue to contribute their quota to the overall growth of the economy.

He said the committee also discussed ways the country could leverage on the huge amount that resides in the pension industry to develop the economy, but in a safe manner.

Still dismissing the report of Arqaam Capital, First Bank of Nigeria Limited and Fidelity Bank Plc, in separate statements yesterday, said that they were adequately capitalised.

In its statement, FirstBank said it remained adequately capitalised as reported in the FBN Holdings first half results released on 26th July 2016.

The chief financial officer of the bank, Mr. Patrick Iyamabo, said: “At FirstBank, we strive everyday to maintain our position as the safest and most respected banking franchise in the country. We continue to benefit and leverage our unique ability to grow and capitalise the institution – a testament to our solid track record.

“Our highest priority remains meeting the financing and banking needs of our customers, by providing world class services, knowledge and expertise to support our customers, even in very difficult times.”

Fidelity Bank also faulted the report, with the bank’s Chief Operation and Information Officer, Mr. Gbolahan Joshua, putting Fidelity Bank’s capital adequacy ratio (CAR) at 16.8 per cent.

“We have an international banking licence and we are expected by the CBN to have a CAR of 15 per cent. So our CAR is 180 basis points above what is required by the CBN.

“Secondly the regulator has those classified as systemically important banks (SIBs). If you are a SIB, your CAR is supposed to be 16 per cent. We are not an SIB, but our CAR is above the threshold set for the SIBs.

“If you look at our first half 2016 numbers, the provisions we made, were almost as much as the entire provision we took in our 2015 financial year.

“Last year, when CBN said banks should make provisions for particularly challenged loans in the industry and said banks should take it through the balance sheet, we took it directly to our profit and loss account.

“So we are far more conservative than some others. That was over N1 billion. So Fidelity Bank is well capitalised,” Joshua added.

The central bank also said wednesday that no amount of blackmail and intimidation would deter it from carrying out its monetary policy objectives.

The acting Director, Corporate Communications of the CBN, Mr. Isaac Okoroafor, who said this in an interview on the sidelines of the Bankers’ Committee meeting, was reacting to a protest that took place at the central bank’s head office in Abuja on Monday.

He urged Nigerians to partner with the fiscal and monetary authorities in order to lift the economy from recession.

He said the present state of the economy was as a result of “our collective failure to make the right choices over the years, to plan and to develop our economy, as well as developments in the oil industry which saw a drop in the price of crude oil”.

“We are not joining issues with anybody and the CBN is not going to yield to any kind of blackmail. But whereby you block avenues through which people were doing round tripping and they go and organise some innocent women, print T-shirts for them to say they are protesting, we would not be deterred by such actions and blackmail.

“All we know is that our economy is facing a very serious situation and both the monetary and fiscal authorities are putting their heads together to find solutions. Already, some of the solutions can be found in what we are already doing at the CBN.

“This includes making sure that we make judicious use of the forex that comes in and directs it to the most important sectors, to stimulate the economy and create jobs,” Okoroafor said.

Fitch Ratings, meanwhile, has confirmed that Nigerian banks are currently experiencing a sharp rise in NPLs, but has pointed out that asset-quality deterioration is not yet a negative driver for the 11 commercial banks in the country under its rating.

Fitch Ratings stated this in a report yesterday and warned of downgrades if NPLs continued to deteriorate.

Worsening NPL trends in the sector have accelerated since the end of 2015. Fitch expects this to continue because operating conditions remain difficult.

The CBN’s latest financial stability report released this week showed that the sector’s NPLs rose to 11.7 per cent of gross loans as of June ending 2016 from 5.3 per cent at the end of 2015.

This exceeded Fitch’s start-of-year expectations of a 10 per cent NPL ratio by the end of 2016.

But NPLs are not evenly spread among banks and sector NPL ratios are distorted by some exceptionally high concentrations. For example, First Bank of Nigeria, the country’s largest bank, reported a 23 per cent NPL ratio at end-June 2016.

“Some tolerance remains on NPL ratios for the banks’ Viability Ratings, which are all in the ‘b’ range. Other key concerns are tightening foreign currency (FC) liquidity, weakening capital adequacy ratios and the sovereign’s ability to support banks, given its weaker financial flexibility.

“If current challenges do not ease, the banks could face further downgrades. Our discussions with banks indicate that most impairment is concentrated in the private sector, which is affected by FC shortages and the depreciation of the naira.

“Borrowers are struggling to access scarce FC and those dependent on naira income are finding it hard to meet escalating repayment costs triggered by the depreciation.

“Sector NPLs would have been higher if banks had not undertaken widespread restructuring of loans to the oil and gas sector, which accounts for 30 per cent of total sector loans,” Fitch added.

It stated that asset-quality indicators in those portfolios were holding up, as borrowers have been able to comply with generous loan maturity extensions.

But the central bank had warned that it was expecting continued deterioration across banks’ oil and gas portfolios during the second half of 2016 as the sector faces sustained low oil prices and production disruptions.

The central bank has set an informal maximum five per cent NPL ratio for all banks. Once this is breached, the regulator can impose measures to boost capital, such as restrictions on dividend payments. In a one-off policy change, the central bank allowed banks to write off fully reserved NPLs by end-2016.

“Writing off loans is normally protracted, but even this measure is unlikely to significantly bring down the level of sector NPLs. The central bank says that unreserved NPLs represented a high 31 per cent of regulatory capital in the sector at end-June 2016, far higher than the six per cent reported at end-2015.

“This puts further pressure on capital ratios, which have been affected by currency devaluation, causing some banks to report limited buffers over regulatory minimums,” Fitch added.

Nigeria’s economy remains in recession and Fitch Ratings opined that it would be difficult for banks to contain the escalation of NPLs.

“We expect real GDP to contract by one per cent in 2016, against our previous forecast of a 1.5 per cent expansion. We do expect a limited bounce-back and our 2017 forecast foresees a recovery to 2.6 per cent. But the medium-term growth outlook remains significantly lower than the 5.6 per cent growth of 2010-2014,” the ratings agency added.