Nairametrics| The rating agency, Fitch, released a report suggesting that Nigerian banks, especially mid-tier banks, are closer to failing regulatory requirements than they reveal, especially due to deteriorating asset quality. According to Fitch, the recent round of results reveal that capital weakness abounds among the mid-sized and small banks.
This situation it explained, is as a result of several banks having their capital adequacy ratios (CARs) under severe pressure from inflated foreign-currency risk-weighted assets following last year’s devaluation of the naira and increasing impaired loans as the economy struggles with lower oil prices. However, because the banks are not provisioning fully for their impaired loans, their underlying capital position is weaker than indicated by their CARs.
The report claims that if all banks were to fully provision for these loans, then some would fail to meet even the minimum regulatory requirement of the the regulator, the Central Bank of Nigeria (CBN). “We have analyzed the sensitivity of selected banks’ CARs to 50% and 100% rises in their end-2016 impaired loans, assuming full provisioning. While most of the larger banks would still meet regulatory capital requirements, several others would fall short in one or both of the stresses.” the report said.
The CBN stipulates that “the minimum regulatory capital adequacy ratio (CAR) of 15% will be applicable to banks with international authorisation and Systemically Important Banks (SIBs) while a CAR of 10% will be applicable to other banks”
Although strong retained earnings on substantial revaluation gains and foreign exchange trading income following the naira devaluation are helping most banks keep their CARs above the regulatory limit, Fitch maintained that asset quality which has come under a lot of pressure in Nigeria due to the prevalent volatile business environment, will play a key role in keeping banks’ CARs above the limit.