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Most Nigerian banks may fail stress tests if economic downturn persists

Should the current economic downturn linger and deepen, Nigerian banks may fail the requisite stress tests.

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net interest income, Nigerian Banks, Fitch, Nigerian banks tremble over Cyber attack, Most Nigerian banks are very likely to fail stress tests should the economic downturn persists and deepens

There is fear that most Nigerian banks may fail the requisite stress tests, should the current economic downturn lingers and deepens, as most lenders will surely drop below the regulatory minimum capital thresholds, which could jeopardize the fragile financial systems.

According to Bloomberg, the tests show that a 3.5% contraction in the gross domestic product in the third quarter, may drop most banks’ capital adequacy ratio to an average of 11.2% from 15%, and a further decline by 4% in Q4 2020 will bring the indices to 9.3%.

“The stress test was conducted within the background of a sharp fall in oil prices, reduced global demand for Nigeria’s oil products, the decline in government revenue, unfavorable current-account position, and a fall in GDP. The severity of the simulated GDP contraction may be contained by a combination of fiscal and monetary interventions,” the CBN stated.

The CBN is exploring key strategic imperatives and policy thrusts over the next five years (2019-2024), that would preserve financial stability through enhancement of its on-site and off-site supervision tools and processes.

(READ MORE: China’s economy bounces back from COVID-19 slump, with a growth of 4.9% in Q3 2020)

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In its efforts towards stabilizing the financial systems, CBN is done with the draft review of its framework, as well as the dynamic macroeconomic, and top-down stress testing tools that would be complementing the existing early warning system tools and enhancing the bank’s ability to proactively and timely identify potential risks to the financial system, as well as, risks to the individual banks.

What you should know

The COVID-19 pandemic lockdown impacted heavily on the overall economic activities, in addition to the slump in the oil price with its resultant effect on government revenues.

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After the lockdowns, several businesses are yet to come back to life and many are still struggling to remain afloat.

There are imminent risks to the banking sector, arising from the spillover effects of the COVID-19 pandemic. For example, there is potential default risk by obligors with oil-related repayment sources or others unable to meet obligations due to the economic downturn, increased concentration of oil and gas exposures, deterioration in the foreign currency asset book, pressure on capital adequacy from currency depreciation, pressure on liquidity from reduced trading lines, and heightened exposure to cyber threats, etc

Bottom line

The lenders require much more vigilance to mitigate all the emerging risks and other complementary measures they may put in place, as well as, restructuring the credit lines for their loan customers, in addition to the provision of liquidity backstops as and when required to safeguard the fragile financial system.

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Financial Services

Conventional insurance firms can now set up their Microinsurance department – NAICOM

NAICOM has issued a circular allowing conventional insurance companies in Nigeria to exploit the huge opportunities in the Microinsurance window.

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NAICOM

The National Insurance Commission (NAICOM) has issued a circular (NAICOM/DPR/CIR/32/2020) allowing conventional insurance companies in Nigeria to exploit the huge opportunities in the Microinsurance window.

The circular was signed by Akah L M, Director (Policy & Regulations), and disclosed that the requirements for the conventional insurance firms to be granted approval for the window operation includes:

  • The insurer shall seek and obtain approval of the Commission to transact microinsurance business.
  • Board resolution approving the establishment of a microinsurance department.
  • Applicant shall apply for window microinsurance national operation licence.
  • The department shall be headed by an experienced Insurance Officer, not below the rank of an AGM.
  • The Insurance Officer must possess a minimum of 7 years post Associate of Chartered Insurance Institute of Nigeria qualification or a minimum of 10 years working experience in a technical department of an insurance institution.
  • Any window operator shall segregate the financial records of its microinsurance business from that of the conventional business.
  • Appropriate reinsurance arrangement shall be put in place.

(READ MORE: NAICOM gives insurance companies additional one year to recapitalise)

What this means

The microinsurance window presents a gold mine waiting to be tapped by the conventional insurance firms in Nigeria, helping them to achieve critical mass in the market.

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This would afford opportunities for those in informal sectors, as well as low-income people and households to enjoy insurance products and services that will protect them against unexpected events, that could threaten their livelihood and businesses.

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Financial Services

CBN introduces “Special Bills” as part of efforts to control money supply in the economy

The Central Bank of Nigeria has announced the introduction of a Special Bill with unique features.

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CBN Gov Godiwn Emefiele

Nigeria central bank has announced the introduction of what it calls the “Nigeria Special Bills” in what it claims is an effort to deepen the financial markets.

The apex bank also claims the instrument avails it with an additional liquidity management tool for Nigeria’s financial system.

In a disclosure, signed by the Director of Banking Supervision of CBN, Bello Hassan, and seen by Nairametrics, it said the Special Bills contained the following features

READ: CBN Governor alleges parallel market used for bribes and corruption

  1. It has a Tenor of 90 days
  2. It comes with Zero coupon, as the applicable yield at issuance will be determined by the CBN.
  3. The instrument will be tradable amongst banks, retail and institutional investors.
  4. The instrument shall not be accepted for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window.
  5. The instrument will qualify as liquid assets in the computation of liquidity ratio for deposit money banks.

The central bank, yanked off retail and instituional investors from accessing the highly lucrative Open Market Operations bills where yields were previously high. It is unclear if this bills will replace the OMO bills or is permamnent.

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READ: Frantic CBN allows diaspora remittances to be withdrawn in dollars and sold anywhere including black market

What this means: With the introduction of the new Special Bills, the CBN aims to securitize the excess Cash Reserve Requirement balances of local banks by offering them short-dated zero-coupon special bills.

  • Since May 2020, the central bank has sequestered over N6 trillion as part of its CRR debits of the accounts of deposit banks.
  • Nigeria’s central bank expects commercial banks to maintain a loan to deposit ratio of 65% and thus debits the accounts of commercial banks who do not meet this target for excess deposits.
  • According to Nairametrica analysts, this new bill provides the banks with an instrument which they can offer to investors in exchange for a return. For example, the banks can sell the “Special Bills” to investors who need fixed income instrument.

Why it matters: The claims the Special Bills is in line with the “CBN’s goal of ensuring optimal regulation of systemic liquidity and promoting efficient financial markets in support of economic recovery and sustained growth,” however Nairametrics undertands there could be more to this.

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However, Nairametrics believes pressure from the banks who have complained about the frequent debits may have resulted in this new Special Bills. In some of the earnings calls listened into by Nairametrics, banks have often cited the drop in their interest income and margins.

READ: Bankers’ Committee embarks on cybersecurity & fraud awareness initiative, launches Moni Sense campaign

What they are saying: A part of the recent CBN disclosure read thus: “The Central Bank of Nigeria (CBN) hereby announces the introduction of Special Bills as part of efforts to deepen the financial markets and avail the monetary authority with an additional liquidity management tool.”

What to expect: The CBN is expected to further clarify the issue and pricing of the recent instrument in coming days.

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Financial Services

Fidelity Bank MD/CEO purchases 5 million additional shares worth N12.97 million

The MD/CEO Designate of Fidelity Bank Nigeria Plc has purchased an additional five million units of the bank’s shares.

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Fidelity Bank M.D purchases 5 million additional shares worth N12.97 million

The Managing Director/CEO Designate of Fidelity Bank Nigeria Plc, Mrs. Nneka Onyeali-Ikpe has purchased an additional five million units of the bank’s shares totalling N12.97million.

This is according to a notification, signed by the bank’s Secretary, Mr. Ezinwa Unuigboje, and sent to the Nigerian Stock Exchange Market yesterday, as seen by Nairametrics.

What you should know

The breakdown of the disclosure showed that the transaction took place in five tranches with an average share price of N2.56.

  • First tranche: 260,190 units of the bank’s share were bought at N2.52 each, amounting to N655,678.8
  • Second tranche: 400,000 units of the bank’s share were bought at N2.55 each, amounting to N1.02million.
  • Third tranche: 130,000 units of the bank’s share were bought at N2.58 each, amounting to N335,400.
  • Fourth tranche: 2,870,000 units of the bank’s share were bought at N2.60, amounting to N7.46million.
  • Fifth tranche: 1,339,810 units of the bank’s share were bought at N2.56, amounting to N3.43million.

(READ MORE: Fidelity Bank slashes growth forecast, readies Eurobond coupon ahead of due date)

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In summary, the total transactions incurred by the MD in buying 5 million additional shares grossed N12.97million.

What this means

The recent corporate action indicates growing optimism in the bank’s future and potentials, which could be a pull factor to other investors.

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