Banks could be at rough end of Naira devaluation – analysts

Nigerian banks’ foreign exchange incomes, assets quality and capital adequacy ratios will be seriously impaired in the event of devaluation of the naira, analysts say.

The analysts say weaker currencies have subverted many banks’ asset quality and capital ratios and worse still, is the fact that these lenders have a significant proportion of their loan books denominated in foreign currencies such as the US dollar.

“The outlook appears grim and management teams allude to this but in our view, the banks are not reflecting this sufficiently in their guidance. Our base case for the sector assumes a margin decline of at least 30 bpts on average, a 70 bpts increase in CoR to 2.4%,a 2 ppts decline in RoE to 10% and 20% devaluation, according to Adesoji Solanke, head of research, Renaissance  Capital Limited in a January 22 note to BusinessDay.

“We however acknowledge investors’ concerns about the performance of the loan book in the event of devaluation and a continued decline in oil prices,” said Solanke.

A significant drop in the price of oil, by more than 70 percent to $29 a barrel, has impacted negatively on the balance sheets of many banks, revenue drive of oil and gas companies and their ability to meet their financial obligations to banks and their financiers among others.

Non-performing loans ratio has remained at 4.65 percent from 2.88 per cent, within the prudential limit of 5.0 percent, though trended closer to the regulatory threshold, reflecting greater levels of stress in the banking industry,” the CBN said in a  2015 report.

The inability of some states to pay staff salaries and government contractors, the seasonal weakness in agriculture loans, and NPLs in the transportation and communication sectors were the major drivers of NPL ratios, according to Tajudeen Ibrahim, head of research, Chapel Hill Denham, in an emailed note to BusinessDay.

In order to protect the currency from continuous battering as a result of  the drop in oil price, the Central Bank devalued the dollar twice since November 2014 and started restricting the sale of dollars to lenders.

Analysts say restrictions in foreign currency trading are the biggest risk to banks as they struggle to find enough dollars to meeting existing obligations to customers and some have to rely on foreign loans.

“We need to review the foreign exchange policy to allow for liquidity flow,” said Ayodeji Ebo, head of research at Afrinvest West Africa Ltd.,by phone from Lagos.

According to the Rencap report, GTBank, FCMB and Zenith’s capital adequacy ratios (CARs) are the most sensitive to a weaker naira, given they do not have sufficient FX tier 2 capital buffers to shield them from the impact of a devaluation; but FBNH, Skye, Ecobank Nigeria (not covered) and FCMB would probably be quickest to breach minimum CAR requirements and feel the pressure to raise capital.

“We think the prolonged decline in oil prices leaves the sector facing unprecedented risks,including FX scarcity (which no bank or the regulator appear to have factored in as a plausible scenario). However, we think that should oil prices continue their steady decline, it could be a matter of who blinks first in provisioning for the extensive loans before the domino effect sets in,” said Solanke.

BALA AUGIE