While the adoption of a flexible foreign exchange policy by the Central Bank of Nigeria (CBN) has been applauded by investors and market participants, a market driven currency system has its fair share of positive and negative impacts on bank’s performance.
This is the summary of a study conducted by Renaissance Capital on banks operating in the country.
In a June 15 note made available to Nairametrics, analysts at the investment house said the new policy will result in revaluation gains as banks use the interbank rate for balance sheet conversions.
Also, FX trading gains are expected to spike though some clarifications have to be made on how the surplus will be generated by lenders since the market is unclear on the modus operandi of the interbank FX market.
The report said
“Will the interbank rate be fixed again albeit at a higher price or will it be freely liberalized or within some sort of band? What happens to the backlog of FX demand, particularly those that affect banks’ asset quality e.g. petroleum marketers’ c.$2bn – will these immediately move to the interbank market, which could hurt banks’ NPLs?”
On the flip side, Non-Performing Loans (NPLs) or assets quality risks and capital erosion are valid risk since the banking sector is exposed to the oil and gas.
“As mentioned previously, GTBank’s expectation of a short term CAR boost if the Naira weakens cannot be seen as broad expectation for other banks, as Zenith for example thinks CAR could decline by about 2ppts if the exchange rate moves to NGN300/$1.,” said analysts at Rencap.
Godwin Emefiele, governor of the CBN yesterday announced that the bank would begin the market driven foreign currency trading next week, abandoning the 16 month fix exchange rate.
At Nairametrics, we believe such a brave move would culminate will spike stock price while bond yields will dip as liquidity flow is expected since investors will be encouraged to invest in the country’s equity market.
“You are bringing confidence in the market. You can actually plan your needs,” said Ini Ebong, Group Treasurer First Bank Holdings Plc, during an interview session at CNBC Africa.“The country’s money is coming back and foreign direct investment will also come back. We need to reopen the market,” said Ebong.
Nigeria, Africa largest economy, hard hit by a significant drop in oil price by 60 percent, had its stock and bond indexes downgraded by international rating agencies as investors divested on the back of a rigid foreign exchange policy.
One of the biggest global rating agencies, Standards & Poor’s (S&P) revised Nigeria’s sovereign credit outlook to negative, from the stable it was previously. Nigeria currently has a B+ rating by the agency.
Moody’s Investors Service in April downgraded Nigeria’s long-term issuer ratings to B1 from Ba3 and has assigned a stable outlook, concluding the review for downgrade initiated on March 4th 2016.
The central bank governor said there will be primary and secondary dealers and that the number of dealers will not be more than 8 to 10. He added that the apex bank is working hard to see that there is more supply of foreign exchange in the market.
“If we improve on the level of supply in the market, those demands will be met in the market. If you rush, you may hurt your profit, balance sheet and spike the interest rate,” said Emefiele
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