FX squeeze may hit lenders asset quality, dollar obligations

Lenders in Africa largest economy should brace up for more tough times as the ongoing Foreign Exchange (FX) squeeze may make it difficult to meet international obligations and worsen their asset quality.

Declining oil prices and the unwillingness of the government to devalue the naira amidst constrained reserves continue to worsen the FX liquidity position of the Nigerian banks, say analysts.

The worsened FX liquidity situation in the Nigerian banking system is an indication that some banks may find it difficult to honour FX-denominated obligations, according to Tajudeen Ibrahim, team head, Chapel Hill Denham, a Lagos based securities and investment firm in an email note to BusinessDay.

“We recall that the CBN reduced banks’ FX borrowings to 75% of their shareholders’ funds unimpaired by losses on 24 October 2014. In other words, the downside risk the CBN flagged a year ago is about to crystallise,” said Ibrahim.

Analysts say the weak oil positions will continue to weaken foreign exchange liquidity, culminating in poor assets quality and spiraling Non Performing Loans (NPL) as a result of exposure to oil and gas loans.

These are not the best of times for banks who a few months ago listed hundreds of delinquent debtors, with a view to avoiding a repeat of the 2009 banking crisis that led to government bailout to the tune of $4 billion.

Renaissance Capital in a December 21 note to clients said Nigerian banks have $3.4bn worth of Eurobonds in issue and admitted slow economic growth may exacerbate their already anaemic positions.

“We estimate that the banks in our coverage universe have at least $1.5bn worth of debt repayments to make in 2016, including $500mn for GTBank, $419mn for Zenith and $202mn for FCMB,” said Adesoji Solanke, lead analyst at Rencap.

“Given the worsening FX challenges, the sector went another leg down last week when some banks (Diamond and Standard Chartered) scrapped the usage of debit cards for international transactions,” Solanke added.

NPLs increased by approximately 70 per cent to N628.54 billion at end-June 2015, from N363.31 billion at end-December 2014, according to the CBN website.

While NPL of 4.65 percent is within the prudential limit of 5.0 per cent, analysts say lenders books may deteriorate on the worsening macro environment.

Nigeria’s economy is reeling from oil price that has dropped by more than 60 percent to under $40, a situation that stoked inflation and depleted the foreign reserves.

The country’s foreign reserves fell to about $29 billion as at December 22 while economic growth slowed to 2.8 percent on an annualised basis in the third quarter from 6.2 percent a year earlier.

The aforementioned economic challenges forced the Abuja based bank to stop importers of about 41 items from obtaining dollars while tightening rules on retail dollar sales in order curb inflation.

Industry analysts however say these restrictions are curbing liquidity as banks find it difficult to meet obligations to customers and have to rely on foreign loans.

Further, investors are withdrawing their money from the system as they fret that a sudden devaluation could result in loss of significant investment.

Despite the aforementioned challenges, the net income of 14 lenders based on their third quarter financial statement increased by 9.75 percent to N541.70 billion, compared with N494.33 billion last year, based on data compiled by BusinessDay.

Loans and advances to customers were up by a single digit 4.54 percent to N13.09 trillion while deposits from customers increased to N19.03 trillion.