Capital adequacy ratio, forex top agenda as CBN, banks meet today

The new computation of capital adequacy ratio, (CAR) excluding non-distributable reserves for raising quality and loss absorbency of banks’ capital base and new code of conduct for foreign exchange market operators, among others are expected to form the fulcrum of  the meeting between the Central Bank of Nigeria (CBN) and chief executives of banks in Lagos today, BusinessDay investigations have shown.

The CBN had last week directed that with immediate effect, regulatory risk reserve and collective impairment on loans and receivables and other financial assets would be excluded from CAR computation, while Other Comprehensive Income (OCI) reserves would be recognised as part of Tier-2 capital, but limited to 33.3% of total Tier-1 capital (including OCI reserves).

It was also directed that while unaudited OCI gains would not be recognised as part of capital, unaudited OCI losses would be deducted from total qualifying capital.

The CBN’s action, according to analysts, is informed by its desire to commence full implementation of Basel 11 in the country, as part of efforts to mitigate against any shock in the system. CAR is the percentage ratio of a bank’s capital to its assets (loans and investments), used as a measure of its financial strength and stability.

The ratio is used to protect depositors and promote the stability and efficiency of financial systems globally.

 In Nigeria, the banking industry’s stipulated minimum CAR is 10 per cent for local banks, 15 percent for international banks and 16 percent for Systemically Important Banks (SIBs).

Basel 11 is a comprehensive international set of regulations aimed at enhancing the risk management of banks. It has three pillars which focus on minimum capital requirement; supervisory processes and market discipline which has to do with disclosure, among others.

BusinessDay further learnt that Godwin Emefiele, the CBN governor, would seek the co-operation of industry operators in maintaining the stability in the system by not patronising the over 500 BDCs that have failed to scale the recapitalisation hurdle and also block leakages in the forex market occasioned by alleged connivance between banks and BDCs.

Some analysts and industry operators, while acknowledging that the policy would attract foreign patronage as it enhances international competitiveness and sanitise the forex market, said that it is capable of putting pressure on CAR of banks, a development that will compel them to opt for tier one (equity raising). 

“The recently introduced 33.3% Tier-2 ceiling of total Tier-1 capital, places a restriction on some of the banks which intend to raise further Tier-2 capital in H2:2014. Hence they may be forced to explore the Tier-1 capital (equity) raise option,” says Ayodeji Ebo of Afrinvest. 

Commenting further Ebo said, “This policy will further exert pressure on the banks’ CAR (Tier-1 Banks FY:2013 — 20.0% vs FY:2012 — 23.3%) in Q3:2014. Recall, CAR requirement for Systemically Important Banks (SIBs) was raised to 16.0% during the latter part of 2013, coupled with the partial adoption of BASEL II. These policies combined, prompt the need for banks to bolster qualifying capital to keep CAR above the regulatory benchmark.” 

He however listed the benefits to include “increased confidence of foreign banks in Nigerian banks, based on the stringent capital requirement. This is in tandem with global counterparts. It also provides a strong buffer for external shocks — In light of the Bank’s exposure to the Eurobond market, the prospects of volatility or depreciation in foreign exchange can be significantly absorbed.”

Razia Khan, analyst with Standard Chartered Bank London, noted that with the policy, for some banks, this would inevitably mean that additional capital may have to be raised in order to meet minimum capital adequacy requirements, as the rules have now been tightened. She expressed the view that  CBN should be commended as the banking sector prepares for accelerated loan growth.

Khan observed that any further capital raising by banks is likely to result in more inflows into the Nigerian market, helping achieve some foreign exchange stability, as well as the new capital raising in form of Eurobond issuance  via Tier 2 capital, increasing the dollar funding of these institutions, with the consequent cheaper dollar lending that might then become possible.

 She called for inbuilt safeguards to guide against breaching of the ceiling, saying, “It means any planned capital raising will have to be carefully managed.  Banks at risk of potentially breaching this ceiling would have to raise Tier 1 capital alongside Tier 2. 

While foreign investors are expected to participate in both equity and debt capital raising, equity-related flows tend to be ‘stickier’, more long-term, and less subject to reversals, when external coniditions change.”

John Omachonu