Foreign and Nigeria-based research bodies are worried about the survival of some small and mid-size banks in the country due to over-exposure to the oil industry, which has not fully recovered from the 2014 price crash, and the recent recession, OYETUNJI ABIOYE writes
Local and international organisations including the International Monetary Fund have expressed worries over the deterioration in the capital and asset quality of Nigerian banks.
Just last week, analysts at Moody’s Ratings raised the alarm over survival of small and mid-size banks operating in Nigeria on the heels of the Central Bank of Nigeria’s fresh directives on internal capital and dividend pay-out ratio to shareholders.
The apex bank had issued a directive in January limiting the amount of dividend banks with higher non-performing loans and low capital adequacy ratios could pay to their shareholders.
The report by Moody’s pointed out that mid-size banks in Nigeria were limiting their loss-absorption capacity against unexpected losses, and that this would restrain their asset growth and revenue generation.
The Tier-II banks operating in Nigeria are Unity Bank Plc, Fidelity Bank Plc, Wema Bank Plc, Stanbic IBTC, Sterling Bank Plc, among others.
According to Moody’s, these financial institutions’ lower capital over the years constrain their ability to grow their business in key sectors of the nation’s economy.
Findings show that Fidelity Bank and Sterling Bank as of June 2017 met the CBN’s CAR requirement but had their NPLs ratio above the central bank’s five per cent threshold.
The NPLs are, however, below 10 per cent.
According to Moody’s, lower capital will constrain the mid-size banks’ capacity to grow their businesses, harm their revenue and delay capital recovery through profit retention.
“We expect most banks to retain a large portion of their profits this year and build up capital cushions although we believe profits will be small,” Moody’s stated in the report.
Analysts have, however, expressed concern over the tier-II banks’ weaker capital adequacy ratio and rising NPL ratios.
The Chief Executive Officer, Enterprise Stockbrokers Plc, Mr. Rotimi Fakayejo, says Moody’s report is in line with current reality of the small and mid-size banks operating in the country.
He maintains that tier-II banks are more at risk if there is any shock in the global or domestic economy.
Fakayejo says, “The report by Moody’s seems correct because the activities of tier-II banks are different from their contribution to the nation’s economy and the results announced on the Nigerian Stock Exchange.
“If there is any 50 per cent shock in the economy, some tier-II banks will not be sustained but if there is 200 per cent shock, it will only affect tier-I banks.”
The Head, Investment Research, PanAfrican Capital, Mr. Moses Ojo, states that some tier-II banks are weak.
Ojo explains, “Some tier-II banks are weak. They have low liquidity ratio and their CAR is below the regulatory benchmark.
“They have accumulation of high NPLs that have eroded their capital base as a result of loan provisioning in line with the CBN’s prudential guideline. It is only the tier-I banks that are maintaining stronger capital base.”
Speaking from a different perspective, the Managing Director at Afrinvest Securities Limited, Ayodeji Ebo, says tier-II lenders are more effective in returns on investment.
Ebo says, “It is more about returns the tier-II banks are able to generate. Tier-II banks have assets turnovers which show that they are able to turn around the limited resources faster than the tier-I banks that have sufficient capital and can give out loan on a long-time basis.
“Tier-II banks do more of short time loans at higher interest though risky, a move to limit their loss–absorption capacity against unexpected losses.
“Agreed, Tier-II banks may have limited capital base but they are also able to work around it and make efficient use of it. It is expected that they would be able to access more capital to boost their CAR going forward.”
He maintains that tier-II banks are always on the move to raise more capital and compete in the market.
However, the solvency stress test by the CBN as of June 2017 that covered 20 commercial and four merchant banks evaluated the resilience of the banks to credit, liquidity, interest rate and shocks.
The financial stability report of the CBN revealed that the average baseline CARs for the banking industry, large, medium and small banks at the end of June 2017 stood at 11.51, 13.13, -6.71 and 13.54 per cent, respectively.
The CBN report states, “These represented a decline of 3.27, 2.34 and 19.46 percentage points for the industry, large and medium banks respectively from the position at end of December 2016. However, the small banks group grew by 10.40 percentage points from 3.14 to 13.54 per cent.
“The decline in CARs was attributable to the challenges in the oil and gas sector coupled with the slow recovery in the domestic economy which resulted in a rise in NPLs and capital deterioration.”
The stress test by the CBN showed that only large banks could withstand a further deterioration of their NPLs by up to 50 per cent.
The report reads in part, “However, none of the groups withstood the impact of the most severe shock of a 200 per cent increase in NPLs as their post-shock CARs fell below the 10 per cent minimum prudential requirement.
“The impact of the severe shocks on the banking industry, large, medium and small banks will result in significant solvency shortfall of 15.21, 9.78, 93.42 and 17.53 percentage points from the regulatory minimum of 10 per cent CAR, amounting to N2.77tn, N1.54tn, N0.98tn and N0.25tn, respectively.”
It further reads, “The results of the stress test of default in exposure to oil and gas sector showed that the banking industry and peered groups, with the exception of medium banks, withstood up to 20 per cent default as their post-shock CARs remained above 10 per cent – industry (10.74 per cent), large banks (12.30 per cent) and small banks (13.34 per cent). Under a more severe shock of 50 per cent default, only small banks had CARs above 10.00 per cent (12.30 per cent).
“This showed that banking industry, large and medium banks, were more exposed to the credit risk in the oil and gas sector than the small banks.”
Moody’s further said that mid-size banks faced greater risk of losing business to financial technology (FinTech) companies because they tend to provide retail banking and payment services to individuals and small and mid-size enterprises, a key entry target market for upcoming Nigerian FinTechs.
“Also, the improving Nigerian economy (we expect economy to grow 3.3 per cent this year), following a contraction in 2016 and a slower growth of 1.7 per cent in 2017, will ease the formation of new nonperforming loans in the next 12-18 months,” the report said.
Last month, Fitch Ratings disclosed that a number of Nigeria’s tier-II banks (banks with total assets less than N2tn) will fall below the capital adequacy ratio of the CBN should the naira depreciate to N450 per dollar.
Early in the month, the IMF released its Nigeria country report, noting that tier-I banks’ capital adequacy ratio had declined to 10.8 per cent in September 2017 from 16.3 per cent in December 2016 and 17.1 per cent in 2013, and was now at its lowest level in the past five years.
Meanwhile, the IMF has advised the CBN to carry an asset quality review of Nigerian banks to determine their potential capital need.
The Washington DC-based fund had last year advised the Nigerian regulator to recapitalise the banking industry against the backdrop of the capital deterioration the industry had experienced as a result of the 2015 fall in global oil prices and the recession.
The Nigerian banking industry has about 30 per cent of loan portfolio in the oil and gas sector.
All rights reserved. This material, and other digital content on this website, may not be reproduced, published, broadcast, rewritten or redistributed in whole or in part without prior express written permission from PUNCH.