The World Bank disclosed in its latest World Bank Nigeria Development Update that Nigerian banks are now faced with serious risks of destabilisation, no thanks to what was aptly described as “the COVID-19 shock”.
Information contained in page 21 of the 88-paged report noted that the pandemic could erode the generally positive performance recorded by the banks in 2019. As a matter of fact, there is a high possibility that the relative stability witnessed in the sector could be eroded.
In specific terms, there is the risk of a resurgence in banks’ non-performing loans (NPLs), especially as it pertains to loan exposure to the country’s and gas sector.
There is also the risk that Nigerian banks may become confronted with a problem of capital erosion. Part of the report said:
“The COVID-19 shock poses serious risks to the financial sector, as mounting pressures in Nigeria’s external sector and the intensifying stress in global financial markets threaten its stability. The economic downturn and the collapse of global oil prices will likely reverse the declining trend in banking sector NPLs, starting with loans to the oil sector, which represent almost 30 percent of private-sector credit, and progressing through the remaining sectors as demand weakens. On-balance-sheet dollar-denominated exposures, which represented 38 percent of banks’ loan portfolio and 55 percent of their liabilities at end-2019, will also be a source of strain. The credit to private sector has severely declined in April 2020 as effects of the lockdown and constrained economic activity as it sharply dropped by 65.7 percent in April 2020 (Figure 1.19).”
The report then explained how the pandemic has mounted pressure on Nigeria’s external reserves, a situation that is further complicated by the current stress in the global financial markets.
The situation could get even more complicated for the Nigerian economy and its financial services sector. And the extent of the envisaged damage will depend on two factors:
- How quickly the pandemic can be brought under control.
- Whether global oil prices will remain stable.
According to the World Bank, if the pandemic can be contained sooner, then the Nigerian economy might just contract by 3.2% this year. Afterwards, the country would embark on a slow recovery phase. However, if the pandemic does not ease off anytime soon, the Nigerian economy might as well shrink by 7.4%, with the recession extended into next year.
In the meantime, the reality is already harsh for some of the banks. As Nairametrics reported earlier today, about 17 banks have approached the Central Bank of Nigeria (CBN) seeking to restructure their loan books amid the pandemic and its economic fallouts.
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On its part, the CBN has taken steps to unify it’s key exchange rates, whilst giving out stimulus packages in the form of loans to farmers and SMEs. However, the World Bank report emphasised that more needs to be done.
You may download the report “Nigeria in Times of COVID-19: Laying Foundations for a Strong Recovery” by clicking here.
CBN expands scope of regional banks in Nigeria, gives compliance timeframe
The aim of this directive is to expand the reach of the regional banks across the country, the CBN said.
The Central Bank of Nigeria (CBN) has expanded the scope of regional banks in the country, by requiring them to open branches in at least one additional geopolitical zone outside of the existing geopolitical zones where their operating licenses cover.
A circular that was issued earlier this week by the apex bank said this new directive is in accordance with “section 8 (g) of the CBN Scope, Conditions & Minimum Standards for Commercial Banks Regulations no  2010 as revised on September 4, 2019.”
The new directive took effect on Friday, June 26, 2020. In other words, all the regional banks are expected to have become aware of this development since then. They now have a timeframe of six months to establish their presence in the geopolitical zones outside of where they currently operate.
It should be noted that prior to this time, regional banks in the country typically operated in at least two geopolitical zones of the federation. However, in line with the new expansion, the CBN shall now prescribe an additional geopolitical zone for each of these regional banks, thereby making the coverage area three geopolitical zones per regional bank.
Meanwhile, the CBN said the aim of this directive is to expand the reach of the regional banks across the country, whilst ultimately promoting financial inclusion. Note also that the new directive affects all regional banks, both the ones engaged in commercial banking and non-interest banking. Some part of the circular said:
“Effective the date of this circular, all banks with regional authorisation shall be required to operate from one additional geopolitical zone as may be prescribed for each institution by the CBN, without prejudice to the existing requirement of the minimum of two (2) geopolitical zones of the federation. The essence is to promote spread and balance of the regional banks across the country.
“The compliance timeline to establish operational footprint at the advised zone shall not exceed six (6) months from the issuance of the regulatory advice to each regional bank by the CBN.”
Banks’ stakeholders express 4 main concerns bothering the sector right now
Banks are more concerned about the arbitrary nature and lack of understanding of the CRR debits.
Stakeholders in the Nigerian banking sector have raised concerns over four main issues that are threatening their investments at the moment.
These concerns range from the perceived “unorthodox monetary policy” moves of the apex bank, to FX liquidity issues, and of course the negative impacts of the COVID-19 pandemic.
These concerns were raised by the representative of some of the country’s top banks (Zenith Bank Plc, FBN Holdings Plc, United Bank for Africa Plc, Guaranty Trust Bank Plc, and Stanbic IBTC Holdings Plc) who recently attended Standard Chartered Bank’s 2020 Africa Investor’s Conference.
Focus on the issues raised
According to an executive summary of the conference which was made available to Nairametrics, banks’ stakeholders are especially worried about the following:
- The negative impacts of CBN’s constant CRR debits.
- The issue of naira’s liquidity management.
- They are also worried about FX liquidity (or the lack thereof), as well as the exchange rate unification at CBN’s different windows. When will the CBN resume dollar sales to foreign portfolio investors in the I&E window?
- Lastly, banks’ stakeholders are worried about COVID-19 and its impacts on earnings outlook, loan restructuring, and asset quality.
Part of the document containing the executive summary of the conference said:
“Banks are more concerned about the arbitrary nature and lack of understanding of the CRR debits as it makes it difficult for them to plan. Most are increasing steps to reduce balances with the CBN to limit debits. According to the CBN, CRR balances with the CBN currently stand at N10tn, 22% of sector assets and 50% of sector deposits. This is negative for NIMs, but funding costs have also declined, dampening the impact. Most of the banks have presented loans to the CBN for restructuring but are still engaging with clients. According to the CBN, loans presented by the sector for restructuring account for 32.9% of total loans, implying an overall weakness in sector asset quality, which we will likely not see in asset quality deterioration by FY20e given the regulatory forbearance.
“Sector NPL ratio currently stands at 6.6% vs. 11% in April 2019. Banks continue to maintain their position of following strict credit processes to drive credit growth, and not grow loans aggressively due to pressure from the loan-to-deposit ratio (LDR) minimum lending policy of the regulator.
“The improvement in oil prices has also reduced the concerns of asset quality deterioration in oil and gas exposure. Obligors in the sector have a breakeven cost price at the USD30/bbl level. Some banks expect further devaluation in the currency at the official window, given the depressed FX revenue outlook from
lower oil prices, but acknowledge the backward integration drive of government to improve corporates’ sourcing of raw materials locally to reduce pressure on FX due to imports.”
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Recall that there have been different reports and forecasts about the recent negative pressures on Nigerian banks and how their earnings/profitability might take a hit. And this is probably the first time these banks are acknowledging and speaking up about these changes. It is unclear, at this point, what the CBN might do to remedy some of the concerns raised.
In the meantime, you may download the full report containing the key takeaways from the conference by clicking here.
Adesina Probe: US Treasury Secretary praises AFDB’s decision on independent review
The AFDB said it supported an internal investigation that cleared Adesina.
The US Treasury Secretary, Steven Mnuchin on Thursday praised the African Development Bank’s decision for an independent probe of the bank’s president, Akinwunmi Adesina.
Mnuchin, while stating that institutions must be held to standards of transparency, commended the AfDB’s decision to pursue an independent review.
“International intuitions must adhere to the highest standards of governance and transparency, and the decision to pursue an independent review demonstrates the strength of the African Development Bank,”
“Undertaking an independent review is fully consistent with a presumption of innocence,” Mnuchin said.
Mr. Adesina was accused by a whistleblower of abusing his office with allegations of nepotism through handing contracts and appointments, accusations he has denied.
The AFDB said it supported an internal investigation that cleared Adesina. However, the US government demanded an independent review.
The panel will be chaired by former Irish president, Mary Robinson, and includes Gambian Chief Justice, Hassan Jallow, and Leonard McCarthy, former World Bank Vice president for Integrity and also an ex-South African government official.
They will review an ethics committee report that found zero evidence of wrongdoings on Adesina and the review is expected to be completed in 2–4 weeks.
The United State is the bank’s second-largest shareholder and called for an independent probe, rejecting the bank’s internal review.
President Buhari has assured Adesina of Nigeria and Africa’s backing from the American “onslaught”.
The shareholders of the bank also include all 54 African Nations and 27 others from the rest of the world and also serve as Africa’s largest multilateral bank.