Raising concern on Banks with higher FX exposure to general commerce

Last week, Central Bank of Nigeria (CBN) unveiled a framework for the establishment of a more flexible foreign exchange regime with the introduction of new primary dealer system, FX futures market, and the inter-bank trading which commenced on Monday.

After having examined the various shocks that the Nigerian economy has been subjected to, the CBN now considers it “right” to restore a more “automatic adjustment mechanism” for the determination of the FX rate. The new FX rate will be market-determined.

Since the pronouncement of this new FX policy, the CBN under the leadership of Godwin Emefiele has received commendation from analysts, investors, currency dealers, industry observers, both locally and internationally. They see the new FX policy as welcome development, saying it will enhance liquidity in the system and curb round trouping among other advantages.

Also, the Nigerian equity market has been rising on the euphoria of the new forex policy. The local currency is not left out as it has strengthened since then.

But one major concern is the issue of accumulated backlog of FX demand. “The risk is that if all of this demand is brought to the newly established interbank market at the outset, the USD-NGN FX rate would come under significant pressure”, Razia Khan, managing director, chief Economist, Africa, Global Research, Standard Chartered Bank, London, said in an emailed note to BusinessDay.

In his address on Wednesday, the CBN stated that this demand would be cleared at the interbank market – likely at a significantly higher rate than today, possibly constraining customers’ ability to fully repay their existing dollar obligations. A Reuters article quoting a letter by the CBN governor to the president, estimates this backlog to be $4bn, with the expectation that it would be cleared over the next four weeks. Important to note that banks have to an extent also been holding naira balances of customers at a weaker rate to cover their FX obligations, which should help moderate NPL risks to an extent.

“In other cases, we could see the gap getting restructured to be repaid over a longer period of time, while in some cases the bank has to take a prudent approach to write it off”, Adesoji Solanke, head of Research, Nigeria and Sub-Saharan Africa banking analyst, Renaissance Capital said in an email note to BusinessDay

According to him, to get a sense of the asset quality implications for the banks, there is need to know the level of unmet demand at each of the individual banks, and the composition of this backlog. The composition of this backlog ranges from maturing letters of credit, repatriations, foreign investment outflows etc. The biggest pressure point is likely to come from the general commerce customers, given the limited scope they have to pass on this cost to their customers.

Given their relatively higher exposure to the general commerce sector, “we are more concerned about the implications of this for the likes of Diamond (19%), Stanbic (12%), FCMB (9%) and Skye (8%). Zenith also has a chunky general commerce portfolio but this also tends to be exposures to larger businesses,” he said.

Deposit money banks that exposed to general commerce are, Zenith 22 percent, Diamond19 percent, Stanbic 12, Access 10, UBA 9, FCMB 9, Skye 8, GTBank 7, FBNH 5 and Fidelity 5 percent.

Under manufacturing, Stanbic leads with 23 percent, Zenith 21, GTBank 20, UBA 17, FBNH 12, Diamond 11, FCMB 9, Fidelity 9, Skye 9, and Access 5.

 

HOPE MOSES-ASHIKE