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Banks’ capital ratio to rise 17% on Basel 111 implementation

Banks increase lending rates after CBN’s jumbo MPR hike

Nigeria’s banking sector regulatory Capital Adequacy Ratio (CAR) is expected to rise to a base 17 percent from 15 percent, for Systemic Important Banks (SIBs), Renaissance Capital, an emerging and frontier market-focused investment bank, said in a note seen by BusinessDay.

This would likely spur capital raise and lead banks to be more conservative on loan growth and dividend pay-outs near term.

CAR is a measure of how much capital a bank has available, which is reported as a percentage of a bank’s risk-weighted credit exposures.

The Central Bank of Nigeria (CBN) requires all banks and banking groups with international authorisation and those that have been categorised by the CBN as being Domestic Systemically Important Banks (D-SIBs) to maintain a minimum CAR of 15 percent, while a minimum CAR of 10 percent will be applicable to all other banks.

Godwin Emefiele, governor of the CBN, noted at the last Monetary Policy Committee (MPC) in November that CAR and Liquidity Ratio (LR) of banks both remained above their prudential limits at 15.2 and 41.2 percent, respectively.

Basel III standard is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk.

The standard is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.

The Central Bank of Nigeria (CBN) has set November 2021 as the effective date for banks to commence the implementation of Basel III guidelines.

“Ahead of this, we saw Access bank raise a $500m additional tier one Eurobond which RenCap advised on,” the investment bank said.

Analysts at Tellimer, a London-based emerging market investment insight and data firm, had pointed to Basel III implementation as one of the key trends to watch in 2022.

Access Bank plc was ahead of other banks in the implementation of Basel III with a successful issuance of $1 billion Eurobond in October 2021.

“I am aware some other banks are coming to the market”, said Johnson Chukwu, managing director/CEO, Cowry Asset Management Limited.

Read also: CRR policy pinches Nigeria’s biggest banks’ return to shareholders

Access Bank in October this year issued an additional $500 million tier-1 Eurobond two weeks after the bank issued the first $500 million Eurobond, which was oversubscribed by 200 percent at $1.6bn on its order book.

Herbert Wigwe, Access Bank’s group managing director/CEO, said, “At Access Bank, we remain fully committed to the execution of our vision to become the “World’s most respected African bank.”

According to Wigwe, the success of the transaction, which he said was the first in the Nigerian banking industry and the first of its kind in Africa outside of South Africa, would significantly enhance the bank’s tier 1 and total capital ratios ahead of Basel III implementation in Nigeria.

Additionally, the bank boss said the fresh capital would provide room for significant growth through the ongoing execution of the bank’s strategic objectives.

In its 2021 banking sector, Afrinvest West Africa said CAR of selected Sub-Saharan Africa (SSA) (19.2%) and Brazil, Russia, India, China, and South Africa (BRICS) (17.2%) banks, recorded was above the 8.0 percent global regulatory minimum under the BASEL III, reflecting effective risk management during the pandemic.

However, African peers such as Egypt (21.7%), Ghana (20.2%) and South Africa (19.8%) were better capitalised than the Nigerian banks (19.7%). In the BRICS region, the Nigerian banks fared better than their peers aside South Africa.

Following a turbulent 2020 on the macro front, 2021 saw Nigerian banks recovering from their third economic crisis in just over a decade, RenCap noted.

This presented a difficult operating terrain for Nigerian banks to navigate, plagued by weak macro conditions, contracting margins, intensifying competition and lingering asset quality concerns.

On the back of rapid digitisation trends witnessed in 2020 due to the global lockdown, the investment bank said customer patterns have evolved, alongside the rise of nimble, innovative, and disruptive fintechs.

These fintechs have recalibrated the finance industry, towards being more focused on key themes such as low cost, easy access, and high speed. Nigerian banks have risen to the challenge, shedding branch heavy models and opting for strategic fintech partnerships, group-wide restructuring and some fintech and pension fund administrator (PFA) acquisitions.