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Top 10 Nigerian banks by Account Maintenance Income

COMMENTARY: Moody’s changes outlook on Nigerian banking sector to negative

CSL Stockbrokers by CSL Stockbrokers
4 years ago
in Business News, Politics, Spotlight
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According to news reports, Moody’s Investors Service had earlier this week changed its outlook for Nigeria’s banking system from stable to negative. Moody’s rating agency highlighted that the change reflects its view that banks will face weakening loan quality and foreign-currency liquidity challenges as depressed oil prices and the global pandemic weigh on Nigeria’s economy.

The outbreak of COVID-19 and the sharp downturn in crude oil prices, which have accelerated capital flow reversals, continue to stoke fears of a further devaluation in the Naira. We say further devaluation because the CBN had in March moved the official exchange rate from N307/US$1 to N360/US$1. At the Investors and Exporters Window (I & E), the CBN also adjusted the NGN peg upwards by 5.7%, as it raised its intervention rate to N380 from N366. Depressed oil prices and subsequent devaluation affect banks in a number of ways.

First is asset quality: A few sectors show more vulnerability to depressed oil prices and devaluation in the local currency and as such bank lending to these sectors will most likely show signs of strain. One of such sectors is the oil and gas upstream/midstream sector. In conversations with banks over the past few weeks, we understand that some banks like Guaranty Trust Bank have hedged their oil and gas exposure over several months while many others believe that it will be possible to restructure these loans – apparently with little effect on asset quality in the short term.

Second is capital erosion: Devaluation, in theory, challenges capital adequacy ratios (CAR) because the Naira-equivalent value of risk-weighted assets (RWA) rises as this includes foreign currency loans. However, the weight of foreign currency loans in RWAs is for the most part moderate (35%-45%), and some banks like FBNH and Guaranty Trust Bank will likely make windfall gains from net long FX positions which in turn boost capital. Some banks also have some of their Tier-2 capital in foreign currencies and will, therefore, see an increase in Tier-2 capital if a devaluation occurs.

(READ MORE: Nigerian banking stocks ignore red flags, boost Nigeria Stock Market)

However, the CBN rule which restricts Tier-2 capital to only 33.3% of Tier-1 capital implies that not all the increase would qualify for the total capital adequacy (Tier-1 plus Tier-2) computation. Overall, we see moderate erosion in CAR for our coverage banks.

Finally, foreign currency liquidity: Borrowings made by banks in US dollars are problematic under a devaluation scenario. As such, banks need to have to perform US dollar assets in order to receive dollars with which to service their own US dollar borrowings. The greater the under performance of US dollar assets in cash terms (for example, re-scheduled US dollar loans to the oil & gas sector, with grace periods during which banks do not receive cash) the higher the likelihood that banks will have to find other sources of US dollars to service their own USD denominated borrowings. An extreme case is when a bank decides to purchase US dollars with Naira at unfavorable rates in order to service a US dollar obligation. We assume however that many banks have access to the supranational lenders, and to development banks for refinancing, which should limit the possibility of occurrence of the extreme scenario.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission.


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Tags: Business NewsCapital Adequacy RatioCBNFinancial RiskInvestor and Exporter windowMoody's ratingMoody’s Investors ServiceNaira DevaluationNigeria banks' assetsNigerian banking sectorNigerian Business NewsUS Dollar
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