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Asoko Sector Brief: Nigeria Banking & Naira Devaluation Q3 2016

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Nigeria’s long-awaited decision to float its currency is adding to growing pressure on local banks’ capital adequacy ratios (CARs), although investors have welcomed the move, with bank shares rising by double-digits following the announcement.

The Central Bank of Nigeria (CBN) on 20 June implemented a decision announced five days earlier to remove the naira’s peg to the dollar. The peg was brought in last March to defend the currency following the fall in crude prices since mid-2014; however it had forced the bank to draw down foreign exchange reserves, leading it to ration foreign exchange, which in turn saw capital flight and a slump in investment. The peg’s removal triggered an immediate devaluation of the currency, which as of 27 June was trading at N281.7 to the dollar, down just over 42% from the pegged rate of between N197 and N199.

The fall could have a significant impact on local banks, and on their CARs in particular, given that around 45% of bank lending is foreign-denominated while banking capital is valued in naira. Following the move, credit ratings agency Fitch said that the ten local banks it covers (out of two dozen in total) would see an average decline in their CARs of around 2%.

However, most of the ten banks that Fitch covers – which include Access Bank, Diamond Bank, First City Monument Bank, andUnion Bank of Nigeria – are sufficiently well-capitalised to avoid  breaching mandatory minimum ratios. The CAR of the largest bank in the country, First Bank of Nigeria (FBN), stood at 17.2% cited in April, that of second-largest player Zenith 21.9% (as of March), and that of third-largest bank UBA at 20% (end-March). Currently, the levels stand at 15% for institutions with international licences and 10% for others.

The CBN plans to bring in a new mandatory minimum of 16% for institutions deemed systemically important (of which there are eight), suggesting some banks could be forced to raise new capital, though prior to the devaluation announcement the CBN postponed the plans to an unspecified date.

Nigerian banks’ CARs were already under pressure prior to the removal of the peg. Ratios at medium and small banks in particular deteriorated notably following the oil price slump in mid-2014, and media reports suggested that three banks had breached mandatory CAR levels, although this was denied by the CBN.

Nevertheless, investors in the sector currently do not appear overly concerned by the peg’s removal, encouraged perhaps by what many observers expect to be a long-term positive effect on the wider economy. As of June 24th banking shares had risen 13.6% since the announcement, led by a 21% rise in the stock of Guaranty Trust Bank, which is the largest listed bank by market capitalisation and which had a CAR of 18.2% at the end of March.

Source: Asokoinsight – Africa company data