• Wednesday, February 21, 2024
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BusinessDay

CBN FX directive seen boosting naira value

Olayemi Cardoso blames foreign education, healthcare for naira’s slide

It seems that the recent foreign currency directive from the Central Bank of Nigeria (CBN) mandating deposit money banks to ensure that they don’t have too much foreign currency or too little compared to their total assets is beginning to yield some positive outcomes for the naira.

The reason being that since CBN made the announcement on Wednesday, the naira, which had slumped to an all-time low of N1,530 to a US dollar at the parallel market, gained 8.5 percent, or N100, to close at N1,400 the following day.

The popular opinion shared amongst banking industry experts and investment analysts is that the reason why the naira suffered one of its worst weeks in its 51-year-old history was because commercial banks were holding on to excess dollars. They refused to sell to the market or the public just to increase their FX revaluation gains or hedge against FX losses due to fluctuations in the exchange value of the naira against major international currencies.

However, the naira, which was perhaps heading for N1,700/USD by the end of the week, miraculously gained. So, it wasn’t just the fault of FX speculators or a function of the forces of demand and supply, but perhaps the commercial banks were keeping the excess to make short-term gains in the SWAP market or hedge against losses in the spot market.

To explain this dynamic situation better, here is a table captured and presented by Abdulrauf Bello, @Rufyb, an economist, investment, and finance expert who compressed the foreign currency position of six of the leading commercial banks in Nigeria. This position was extracted from their statement of financial position for H1, 2023, and explains not only the depth of FX exposure and control in the banking system.

The key component of the table showed, like any other statement of financial position, the total assets, the total liabilities, net assets, swaps, and adjusted net assets, all in ($’bn).

The banks in question are Access Holdings, Fidelity, GTCO, Stanbic, UBA, and Zenith Bank, with a total combined asset of $29.34 billion.

However, a caveat was stated by Bello. The caveat was that “Access Bank has a significant exposure to foreign subsidiaries, and the Group did not break down the currency composition of its Nigerian business.” As a result of that, the author said that the total assets of these banks were $18.96 billion.

Furthermore, excluding Access, which had $10.38 billion in FCY assets, GTCO, Zenith Bank, and UBA declared $5.88 billion, $4.36 billion, and $4.31 billion, respectively.

For the total liabilities of these banks, excluding Access Holdings, the total liabilities (FCY) of the remaining five banks were $19.02 billion.

Zenith Bank and GTCO had more customer deposits in foreign currencies, with $3.93 billion and $3.74 billion, respectively. Even Stanbic posted a total customer deposit of $690 million.

Now this is where it gets interesting. Aside from Stanbic, GTCO, and Fidelity, which posted positive net assets (total assets-total liabilities), UBA and Zenith Bank posted negative positions of -$430 million and -$1.37 billion, respectively.

However, because banks are allowed to swap, they can hedge against FX losses that may arise from trading in FX.

According to the Corporate Finance Institute (CFI), “swaps are derivative contracts that involve two holders, or parties to the contract, to exchange financial obligations.

“Interest rate swaps are the most common swap contracts entered into by investors. Swaps are not traded on the exchange market. They are traded over the counter because of the need for swap contracts to be customisable to suit the needs and requirements of both parties involved.”

Swaps are a function of the changes in the market and are mostly used by commercial banks to hedge against foreign exchange risk. They usually do this by entering into a forward contract with the Central Bank, or, in the case of Nigeria, the CBN.

A detailed examination of the table showed that because Zenith Bank and UBA, aside from Access, had negative net assets, they engaged in swaps to the tune of $2.24 billion and $1.69 billion, respectively. While the others didn’t have any swaps.

Finally, in adjusted net assets, the top five banks—Fidelity, GTCO, Stanbic, UBA, and Zenith Bank—all had positive positions of $180 million, $1.34 billion, $230 million, $1.26 billion, and $870 million, respectively.

However, speaking with BusinessDay, Bello explained that the FCY position for all the banks except Access was for their Nigerian position. That is the total customer deposits in USD, EUR, and POUNDS all rated in USD, debt issued and others, cash and cash balances, loans to customers, and financial assets and securities of their Nigerian operations.

When asked if the recent CBN directive would help boost the value of the naira, Bello answered, “I don’t know. Because of their other moving variables.”

He added that the exchange rate of the naira, like any other currency, is a function of demand and supply. “Demand is high; everybody knows that, and apparently, the demand for the USD is way above what the supply is saying, and that is why prices are moving.”

The investment analyst noted that while the central bank cited risk management as the purpose behind its foreign currency directive, the prevailing belief was that it aimed to enhance “foreign currency liquidity in the market.”

Bello explained that what the CBN is asking banks to do is sell that excess of FCY currencies to the market. Instead of, for example, having an asset of $10 million with a liability of $8 million, the banks are expected to sell the excess of $2 million to the market to help stabilise the naira by taking care of demand.

He went on to say that what the CBN is asking the banks to do is ensure that if, for example, they have $5 million on their balance sheet, it should be $5 million in assets.

In essence, assets must not exceed liabilities. If it does, the excess should be sold.

In explaining further, he said that the negative FCY net assets of three of the banks show that a slight movement against them in the FX market could result in a loss.

Because these banks may suffer losses, they hedge their position by going to the derivative market and saying, “The exchange rate is N450, I have taken a dollar liability, and I am net short. So, I want to buy long.”

Bello admitted that because of these likely losses coming from FX fluctuations, what most banks do is hold long positions or engage in buying and selling at the forward market, i.e., agree to sell and buy at an agreed price in the future.

However, speaking on this matter, a finance analyst who prefers his identity not to be disclosed praised CBN for mandating the commercial banks to sell the excess.

He explained that what the banks were doing was good. Analysing the bank’s FCY position (H1’2023), he said that the banks need to push out most of the idle FCY cash captured in their asset position. “Why hold so much cash?” he asked. “The best thing to do to stabilise the system is to give out most of this cash to businesses and legitimate demands.”

He also questioned why these banks should have so much in financial assets and investment securities instead of loaning to the real sector and meeting legitimate demands for FX in the economy. For example, he wondered why Access should have over $3 billion in financial assets and investment securities.

He, however, advised that the only solution to strengthening the naira against foreign currencies is to “ensure that the foreign currencies invested in short-term securities are released to businesses that require funds. So that supply can meet demand and price drops.”