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CBN’s credit stress test show banks vulnerable to shocks above 100.00% in NPL

The Central Bank of Nigeria (CBN) conducted a credit rust stress test for the banking sector at the end of December 2018, which revealed that lenders could withstand a shock of up to 75.00 per cent increase in the industry Non-Performing Loans (NPLs) as the Capital Adequacy Ratio (CAR) remained above 10.00 per cent. However, the industry was vulnerable to shocks above 100.00 per cent increase in NPLs as the industry CAR fell below 10.00 per cent.

Similarly, the credit concentration stress test showed that the CAR of the banking industry fell below the 10.00 per cent regulatory threshold under scenarios 2 and 3 of the test. Under scenario 3, the CAR of the banking industry declined to (1.42) per cent, from the pre-shock position.

This implies a severe negative impact on the industry if the quality of the exposures to five largest obligors worsened.

The breakdown of banking industry total credit by sector showed that the oil and gas sector accounted for 30.29 per cent, while manufacturing, government, general commerce, finance and insurance, and others accounted for 14.53, 6.02, 7.40, 6.42 and 35.34 per cent, respectively, at the end of December 2018, according to the CBN’s Financial Stability Report (FSR) released last week.

Analysts in the financial services sector had projected a further rise in the NPLs following the recent directives on Loan to Deposit Ratio (LDR)  by the CBN.

The CBN had directed all deposit money banks to maintain a minimum LDR of 60 percent by September 30, 2019 and subsequently increased it to 65 percent with December 2019 as the new deadline.

The focus of the LDR minimum is to promote consumer and mortgage credit to drive demand, the regulator explained.

At the end of December 2018 banking industry stress test, which covered 21 commercial and 5 merchant banks, was conducted by the regulator to evaluate and determine the resilience of the industry to probable and adverse shocks, including credit, liquidity, interest rate and contagion risks.

The report revealed that baseline capital adequacy ratio (CAR) for the banking industry at end-December 2018 was 15.26 per cent, indicating 3.18 percentage points increase from the 12.08 per cent recorded at the end of June 2018.

The baseline banking industry NPL ratio was 11.64 per cent at the end of December 2018, showing a slight improvement of 0.81 percentage points from the 12.45 per cent recorded at end-June 2018.



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