Thisday|| Compliance with the Basel requirements on operational risk will result in a reduction of at least 250bps of the Capital Adequacy Ratio (CAR) of Nigerian banks, analysts have said.

In  a report made available to THISDAY, analysts at FBN Capital stated that if the banks decide to completely offset this by raising additional capital, around N40 billion ($250m) on average will need to be raised by each bank.

The Central Bank of Nigeria (CBN) had December last year published two new circulars, which effectively indicated that the CBN expects banks to begin adopting elements of Basel II and III relating to market and operational risk.

According to FBN Capital, “Very few banks in Nigeria publish their value at risk (VAR) and as such determining the market risk impact on the CAR calculation is near impossible at this time.

However, based on the magnitude of the figures from those that publish their VAR, such as Diamond Bank Plc, we estimate the impact of market risk to be modest on capital requirements for most banks. A number of the banks we have spoken to confirmed that this is indeed the case – that operational risk will have a much greater impact on their CAR.”

The analysts added that assuming a minimum 250bp impact to CAR as a result of the CBN circulars, the spotlight will return to banks with the lowest capital adequacy ratios i.e. Diamond Bank Plc and Skye Bank Plc.

“Both tried to raise additional capital in 2013 but were not successful, most likely because they deemed pricing as prohibitive. The urgency to raise capital just increased because applying the market risk capital charges will likely push their CAR below 15 per cent, “they added.

They also stated that beyond Diamond Bank Plc and Skye Bank Plc, UBA Plc, Access Bank Plc and FCMB Group Plc may also consider raising additional capital because the potential reduction in CAR brings them closer to the 15 per cent minimum limit.

They added, “Although Skye Bank has been public with its intention to raise equity, we should stress that we expect the bulk of any capital raising exercise that Nigerian banks will embark on to be debt (tier 2).

Deal book 300 x 250

There is no indication yet that the CBN will adopt elements of Basel III which seek to reduce the proportion of tier 2 capital for regulatory capital calculation purposes. Skye is pursuing a mix of debt and equity because it is already one of the most leveraged banks in the sector with a low asset to equity ratio.”


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