The Central Bank of Nigeria (CBN), by April this year, will begin the enforcement of Basel III guidelines. The new rules mean lenders have to adopt guidelines on leverage ratios, capital requirements, and liquidity.
The Basel requirements are instituted by the Bank of International Settlement (BIS) which is owned by 60 central banks. The rules put forward are thus an industry benchmark.
Tough year ahead
The new rules indicate a tougher regulatory environment on the heels of IFRS 9 reporting standards taking effect. Under IFRS 9, banks are to make provisions for loans gone bad, and those expected to go bad.
Highlights of the rules
- Leverage ratio is arrived at by dividing tier one capital by total exposure.
- Liquidity coverage ratios mean banks would have to hold capital that covers the average cash outflow over 30/60/90 days respectively.
- Countercyclical buffer. Simply put banks will be required to raise more capital, in periods of high credit growth.
Implication
Banks may have to either raise tier two capital or cut down on dividends in a bid to conserve capital. Some lenders have either done this in anticipation or due to their own extraneous issues.
FCMB had in its Q3 2018 investor call last year hinted at the possibility of a tier two raise, and maintaining a conservative dividend outlook.
The Nigeria Deposit Insurance Corporation (NDIC) annual report for 2017 (the most recent available) show Non-Performing Loans (NPLs) in 2017 amounted to N2.36 trillion. This represents a 13.46 per cent decrease compared to N2.08 trillion in 2016.
The new rules mean some banks could post higher NPLS in their full-year 2018 results.
While the country has since exited recession, growth remains weak, and banks have since cut down on lending.
