Nigerian banks face elevated risks from FX liabilities

Nigerian lenders are facing elevated risks from their high exposure to foreign currency deposits, according to ratings agency, Standard and Poor’s (S & P).

Domiciliary deposits in the Nigerian banking industry have increased significantly to about 26 percent of total deposits, from an average of 15 percent in 2008.

“This means there is a significant dollarisation of the banks funding and the asset liability mismatch is a new risk” Matthew Pirnie, director of Financial Services Ratings, said yesterday in an interview on the sidelines of the S & P annual Nigerian Ratings and capital markets conference.

“If there is a domiciliary run on the banks, they will not want to be going to the interbank market or CBN.”

Banks with FX deposits are also exposed by a weakening naira, according to Pirnie.

Pirnie tells BusinessDay that dollar liquidity is not universally well managed across the sector, with many banks relying on lines from the Central Bank and international partner banks to provide dollars if there is a run of dollars on the balance sheet.

“We believe that in a systemic shock, this risk may affect banks’ ability to repay dollar liabilities,” Pirnie said.

Nigeria’s big banks all have significant exposure to dollar deposits which rose last year, partly as a result of devaluation of the naira.

Guaranty Trust Bank’s foreign currency deposits grew by 34.08 percent in 2014, while Access Bank’s FX deposits increased by 24 percent, according to data from the bank’s website.

In Zenith Bank, domiciliary accounts made up 22.5 percent of total deposits and in First Bank, they were equivalent to 20 percent of deposits.

“We see a huge FX risk in exposure of the banks. Some of the FX loans extended by the banks are not backed by dollar receivables,” said Felix Aremo, Ecobank’s group Cluster Head of Risk Management at the same conference.

Pirnie estimates that about 20 percent of banks current FX loans are not linked to dollar receivables.

The Central Bank of Nigeria (CBN) seeing the risk in banks exposure to FX, introduced a range of measures to manage this exposure in October 2014,including limiting foreign-currency borrowing to 75 percent of shareholders’ equity and introducing a new 20 percent net open position cap on overall foreign currency assets and liabilities.

The uncertain macro – economic environment may also lead to a rise in credit losses for banks in 2015, according to Standard and Poor’s.

The price of the commodity (oil) which makes up 70 percent of government revenue and 95 percent of exports is down some 50 percent in the past year.

The naira also depreciated significantly against the U.S. dollar by about 15 percent over 2014.

Credit losses for the industry could move to about 2.5 percent and 3 percent, as loans begin to season in 2015, and pressure mounts on lending in natural resources, public utilities, and foreign currency, according to S & P.

“Banks’ reduced profitability will likely lead to rapid loan growth in sectors where risks are not fully understood, including small and midsize enterprises, retail, energy, and foreign currency lending,” Pirnie said.

PATRICK ATUANYA