Nigerian banks tap dollar debt ahead of Basel III

Nigerian commercial banks are exploring debt opportunities from the foreign capital market amid regulatory-driven capital increase to be enforced by the Central bank of Nigeria (CBN) in November 2021 through the Basel III guidelines.

In fulfilment of its announcement a year ago (September 11, 2020) the CBN said it would commence a phased implementation of Basel III standards for banks and revise the existing Basel II guidelines on Regulatory Capital and Supervisory Review Process in 2020/2021 fiscal years.

Less than a month after Access Bank, Nigeria’s largest lender by assets raised $1billion through Eurobond issuance, Fidelity Bank, a tier-two lender, has also announced its plans to raise $500 million from the international debt capital market through an unsecured notes issuance.

With the backing of the Securities and Exchange Commission (SEC), Fidelity Banks aims to list the notes on the Irish Stock Exchange, an international debt capital market where companies and governments can rai se funding through the trade of debts, securities, corporate and government bonds.

According to a notice to the investing public as published by the Nigeria Exchange Group (NGX) on Monday, Fidelity Bank said it will be issuing the debt with no collateral but with high-interest rates.

The purpose of the notes’ issuance, according to the lender, is “for general corporate purposes including supporting its trade finance business.”

The funds the commercial bank plans to raise through the notes issuance will help it to meet the Basel III capital obligations, market analysts said.

Intended to strengthen bank capital requirements by increasing their liquidity and decreasing leverage, the Basel III standard is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk.

While some analysts have some reservations about the standard, they believe it will reduce the risk of a build-up of excessive leverage in the banking system and provide a safeguard against excessive concentration.

Read also:Nigerian bank raises dollar charges by 45.15%

“Finally, all banks are to note that capital add-on will be introduced in a phased manner as part of the overall supervisory process of Pillar II assessment to enhance better risk management practices and better align their capital with their risk profiles,” the letter from the CBN reads.

In the document to all banks dated September 2, 2021, the CBN said the implementation of the guidelines will commence with a parallel run effective November 2021 for an initial period of six months, which may be extended by another three months, subject to milestones achieved in the supervisory expectations.

The industry regulator said it had completed the development of guidelines for Basel III implementation by banks in 2020. However, due to the outbreak of the COVID-19 pandemic, the implementation was suspended to minimise the regulatory compliance burden on the banks.

The apex bank has also issued guidelines to cover the following standards, amongst others: Liquidity Coverage Ratio (LCR), Liquidity Risk Management (LRM) and Internal Liquidity Adequacy Assessment Process (ILAAP), Large Exposures and Regulatory Capital definition.

“In addition, the revised guidelines on the Supervisory Review Process of internal Capital Adequacy Assessment Process (SRP/ICAAP) are also issued herewith for adoption by banks,” the CBN said.

The CBN said the objective of these guidelines is to define the minimum requirements for Liquidity Coverage Ratio (LCR) for reporting entities operating in the Nigerian banking industry.

The LCR aims to promote short-term resilience of the liquidity risk profile of reporting entities by ensuring that they have an adequate stock of unencumbered high-quality liquid assets (HQLA) that can be converted easily and immediately into cash in private markets to survive a significant stress scenario lasting 30 calendar days.

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