The depreciation in the Nigerian Naira will put a strain on the assets of Nigerian banks struggling to raise asset quality to the regulatory threshold, according to Moody’s Investors Services.
The Central Bank of Nigeria (CBN) weakened the market rate for the currency to N380 to the dollar from N365 while the official exchange rate was allowed to depreciate by 15% to N360 per dollar from N307. The unit traded N381 per dollar on the interbank spot market.
Africa’s largest economy lately changed its exchange rate by 4% the naira versus the dollar, a move that will cause concern for Nigerian banks’ credit book and capital metrics “as they have a high proportion of foreign-currency-denominated loans”.
Since the outbreak of the Coronavirus, which started in China, local importers have been front-loading dollar demand.
Rating agency, Fitch has said that Nigeria’s B+ rating, which has a negative outlook, could face problems if a prolonged attempt to defend the country’s currency peg ate heavily into its international reserves.
What it means: Foreign-currency borrowers, who do not earn foreign currency, will require higher Naira cash flows to meet their obligations, diminishing their repayment capacity.
The banking industry is struggling with non-performing loans, as percentage of total credit dropped to 9.3% as at mid-2019 from 12.5% a year earlier. The CBN wants it below 5%.
A weaker Naira also increases Nigerian banks’ risk-weighted assets related to their foreign currency loans, putting negative pressure on their capital metrics.
This trend also persisted in the Investors and Exporters (I&E) window during the period as the indicative exchange rate jumped to N374 per dollar at the close of business from N368.33 per dollar on 11th of March 2020, translating to N5.67 depreciation for the naira, and the biggest daily depreciation since 2017.
Last week, as a result of the adverse effect of COVID-19, CBN weakened the parallel market rate for the currency to N395 per dollar from N365 while the official exchange rate was allowed to depreciate by 15% to N360 per dollar from N307 per dollar.