FX liquidity challenges worsen banks asset, earnings outlook

The foreign exchange  (FX) liquidity challenges faced by banks seem to show no signs of abating but are likely to first get worse before any improvements, making for a weak asset quality and earnings outlook for the sector, according to analysts at Renaissance
Capital.

The analysts highlight that the sector has $3.4 billion worth of Eurobonds in issue and at least $1.5 billion worth of debt repayments to make in 2016.

The growing concern by investors in Nigerian banks’ debt is that as the country’s FX liquidity situation worsen, oil prices continue to decline as companies struggle to access FX to liquidate their FX obligations, some of the FX borrowings were on-lent to power companies with naira revenues and other naira generating companies.

“What does it mean for the sector’s ability to service interest and principal on their obligations? We think this concern is valid and
will remain a topical issue through this cycle,” Adesoji Solanke, banking analyst at Renaissance, said in a report.

Given the worsening FX challenges, the sector went another leg down last week when some banks like Diamond and Standard Chartered scrapped the usage of debit cards for international transactions – a development the analysts think could become a trend should the situation persist. This follows the continued reduction by a number of banks of their debit card international spending limits, now to $5,000 to 15,000 annually (from $50,000), $1,000 monthly and as low as $100 daily.

Declining oil prices and the unwillingness of the government/Central Bank of Nigeria (CBN) to devalue the naira amid constrained reserves continue to worsen the FX liquidity position of the Nigerian banks.

“We highlight the sector’s challenges across four fronts, and believe that, should this trend persist in a weak oil price environment,
asset quality and international obligation default risks could be significant,” Solanke added.

Meanwhile, naira on Monday strengthened against the dollar across FX market segment due to reduced demand by end users.

It appreciated in value against the dollar by N10 or 3.64 percent to close at N265/$ compared with N275/$ traded last week Friday
at the Bureau De Change segment of the FX market.

The local currency also firmed against the greenback at the inter-bank market by N1.78k or 0.89 percent as it closed at N197.44k/$ as against N199.22k/$ last week Friday, data from FMDQ revealed.

Naira gained N13 or 4.64 percent against the dollar at the parallel market on Monday.

It closed at N267/$ from N280/$ closed on Friday last week.

However, the CBN has closed the inter-bank FX market for the year, following the festive period with its clearing rates closing at N197/$.