Nigeria’s banking industry will need to recapitalise in the medium term following the proposed new capital requirement by the Central Bank of Nigeria (CBN), according to an indigenous credit rating agency, Agusto & Co.
Though the Lagos-based agency said the CBN is yet to disclose the proposed new capital requirement, it explained that the COVID-19 pandemic is a further threat to the capital base of the banking industry which has been under pressure since the adoption of IFRS 9 accounting standard.
“The banking industry will need to recapitalise in the medium term in view of proposed new minimum capital requirements, though yet to be disclosed by the apex bank,” Agusto & Co. said in a synopsis for its 2020 Banking Industry Report seen by BusinessDay on Monday.
According to Agusto & Co., even though most industry operators have a core capital base that very well exceeds the regulatory minimum, the banking industry’s stage two loans are a threat to the sustainability of its earnings especially if additional provisions are required in the event of a migration to the stage three category and subsequently, write-off.
Meanwhile, Godwin Emefiele, the governor of the Central Bank, had in 2019 announced that the apex bank is set to recapitalise Nigerian commercial banks. The CBN governor announced this in Abuja while unveiling the apex bank’s new monetary policy roadmap for a five-year tenure (2019-2024).
The Central Bank chief said the aim was to re-position the Nigerian banks among the top 500 banks in the world, while also reducing the risks and the possible impact of any economic crisis on the financial sector.
“In the next five years, we intend to pursue a programme of recapitalising the Nigerian banking industry, to re-position Nigerian banks among the top-500 in the world,” Emefiele said in June 2019.
Recall that in July 2004, the Central Bank, under the leadership of Charles Soludo, announced the recapitalisation of the banking sector from N2 billion to N25 billion with effect from December 31, 2005. The initiative by the apex bank led to the reduction of the total number of banks in Nigeria from 89 to 24.
Agusto & Co. believes that the volume of stage two loans is a threat to Nigeria’s financial industry’s asset quality and future profitability. Thus, the credit rating agency said the stage two loans of Nigerian commercial banks require effective monitoring, particularly in the face of heightened macro-economic risks.
“The prevailing headwinds make effective monitoring of these exposures imperative to forestall significant deterioration in asset quality, subdued earnings and lower capitalisation ratios in the near term,” the rating agency said.
Meanwhile, provisions made on stage two loans in line with IFRS 9 as a percentage of total stage two loans stood at a low 7 percent while stage three loans had a coverage ratio of 48 percent as at 31 December 2019, according to the 2020 Banking Industry Report by Agusto & Co.
Stage two loans primarily comprise exposures with an increase in the associated credit risk compared to when the loan was disbursed. The COVID-19 pandemic with its impact on businesses has elicited an increase in the volume of stage two loans.
According to Agusto & Co., stage two loans are susceptible to adverse migrations in the face of a prolonged macroeconomic downturn. Following the forbearance granted by the CBN in March 2020, permitting banks to restructure loans to businesses that have been adversely impacted by the novel COVID-19 pandemic, the banking industry had restructured over N7.8 trillion (almost half) of the loan portfolio as at June 2020, according to the CBN.
Following the 2016 recession, Nigeria’s banking industry had written off loans of over N1.9 trillion of its loan portfolio as at the full year 2019, with severe implications on capital.
Going by the International Financial Reporting Standard (IFRS) 9, the 2020 Banking Industry Report by Agusto & Co., explained that approximately 23 percent of the industry’s gross loans and advances was classified in the stage two category as at 31 December 2019.
As at the same date, four out of the 24 banks covered in the report had stage two loans to gross loans ratios above the 23 percent industry average, the report said.
“While the forbearance is expected to keep the industry’s impaired loan ratio, which stood at 7.6% as at 31 December 2019, at bay in the short term,” Agusto & Co. said it is “concerned about the performance of these affected loans, given that the coronavirus pandemic is yet to be curtailed and a second wave may be looming.”
