The Financial Stability Report (FSR) released by the Central Bank of Nigeria (CBN) showed that commercial Banks in the country contributed ₦190.89 billion to the Banking Sector Resolution Cost Trust Fund (BSRCTF) Sinking Fund from January to June 30, 2017.
The sinking fund mandates commercial banks to contribute five basis points or 0.5 percent of their audited total assets at the end of each year to Asset Management Company of Nigeria AMCON to enable the corporation pay some of its recovery expenses.
The CBN also makes an annual contribution of ₦50 billion to the fund, which was established following the realization that recoveries from AMCON-acquired bad loans might be insufficient to meet the cost of restoring financial stability. The fund was to further ensure that the burden on the national treasury is reduced as any banking crisis will be resolved by banks, the CBN and AMCON.
The fund, according to the CBN Governor, Godwin Emefiele will be used to redeem outstanding bonds of the Asset Management Corporation of Nigeria (AMCON).
The Financial Stability Report which highlights developments in the financial system in the first half of 2017 showed that in the capital market segment, the Nigerian Stock Exchange All-Share Index (NSEASI) and market capitalization both increased due to improved confidence in the market and gradual economic recovery. Total bonds outstanding increased in the first half of 2017 by 2.96 percent.
In the banking industry, the asset quality of commercial banks deteriorated in the first half of 2017 as the ratio of Non-Performing Loans NPL to gross loans increased, compared with the level at end-December 2016. This led to a slight capital deterioration and a decline in earnings indicators.
To test the resilience of the industry, a stress test was conducted on the banks. The test showed that the Capital Adequacy Ratio CAR of banks deteriorated where the most severe shocks were applied. It also showed that liquidity shortfalls will only occur when the most severe shocks of a cumulative 30-day run were applied.
The end-June 2017 banking industry stress test, which covered 20 commercial and four merchant banks were conducted to evaluate the resilience of the banks to credit, liquidity, interest rate and contagion risks (shocks)
The average baseline Capital Adequacy Ratios (CARs) for the industry, large, medium and small banks at end-June 2017 stood at 11.51, 13.13, -6.71 and 13.54 percent. These represent a decline of 3.27, 2.34 and 19.46 percentage points for the industry, highlights developments in the financial system in the first half of 2017 large and medium banks, from the position at end-December 2016. The small bank’s group grew by 10.40 percentage points from 3.14 to 13.54 percent.
The decline in CARs was attributable to the challenges in the oil and gas sector coupled with the slow recovery in the domestic economy, which resulted in a rise in bad loans and capital deterioration.
The report also noted the impact of severe shocks on the banking industry, large, medium and small banks, will result in significant solvency shortfall of 15.21, 9.78, 93.42 and 17.53 percentage points from the regulatory minimum of 10 percent CAR, amounting to ₦2.77 trillion, ₦1.54 trillion, ₦0.98 trillion and ₦0.25 trillion.
According to the report, large banks are likely to suffer more losses over credit exposure to oil and gas sector.