Analysts at Moody’s Investor Service have said that lower capital by Nigeria’s midsize banks will constrain the financial institution’s capacity to grow their business, harm their revenue and delay their capital recovery through profit retention.
The rating agency stated this in a report released on Monday, after a recent report by the International Monetary Fund (IMF) showed that Nigeria’s Tier 1 banks’ capital ratio had declined to 10.8 per cent in September 2017 from 16.3 per cent in December 2016 and 17.1 per cent in 2013, and now at its lowest level in the past five years
The report was titled: “Nigeria’s midsize banks’ declining capital is credit negative.”
Additionally, it stated that Nigeria’s midsize banks face greater risk of losing business to financial technology (fintech) companies because they tend to provide retail banking and payment services to individuals and small and midsize enterprises, a key entry target market for upcoming Nigerian fintechs.
The Central Bank of Nigeria’s (CBN) Financial Stability Report as at June last year that was released recently, showed that the result of a stress test revealed the banking system’s capital vulnerability was driven by midsize banks’ weaker capital conditions.
It added: “These trends are credit negative for Nigeria’s midsize banks because they limit their loss-absorption capacity against unexpected losses and will restrain their asset growth and revenue generation.
“A lower Tier 1 ratio indicates that the capital cushions of banks declined and were less able to absorb any unexpected credit losses amid Nigeria’s still-challenging operating environment.”
In reaction to a recent CBN’s policy which limited the amount of dividend payout ratios for banks with non-performing loans and capital ratios beyond certain thresholds, Moody’s anticipated that most banks would retain a large portion of their profits this year and build up capital cushions, “although we believe profits will be small.”
Also, the improving Nigerian economy (we expect economy to grow 3.3per cent this year), following a contraction in 2016 and a slower growth of 1.7 per cent in 2017, will ease the formation of new nonperforming loans in the next 12-18 months,” it stated.