With Weak Capital, Tier 2 Banks Still Vulnerable, Analysts Insist

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Obinna Chima

Some of Nigeria’s tier 2 banks are operating with weak capital which makes them vulnerable to shocks, a new report released wednesday, has indicated.

Analysts at Lagos-based CSL Stockbrokers Limited, a subsidiary of the FCMB Group, gave the warning in a report on its outlook for the equities market in 2019.

Capital adequacy is a persistent issue for a number of Nigerian banks.
The CBN requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15 per cent while banks without international subsidiaries maintain a CAR of 10 per cent.

The minimum requirement for systemically important banks is 16 per cent.

Therefore, the firm in the report, pointed out that given the tough regulatory environment, some banks would require more capital in order to create sufficient buffers for their growth plans as well as unforeseen problems.

It also stated that any naira devaluation would affect the capital adequacy ratio (CAR) of some banks negatively.
Furthermore, it noted that the implementation of Basel III, a new global regulation on CAR, which is expected to commence this year, was also expected to put some pressure on capital.

“A naira devaluation, in theory, challenges CAR because the naira-equivalent value of risk-weighted assets (RWAs) rise given that these include foreign currency loans.

“The impact of foreign currency loans on RWAs is however expected to be offset by windfall gains banks make from net long FX positions, which should in turn boost capital.

“Our expectation of a 5-7 per cent devaluation in the naira to N385-N390/US$ however is minimal and should have very marginal impact on the capital position of our covered banks.

“Asset quality also poses a challenge to capital adequacy. If a bank suffers an unexpected rise in cost of risk (COR) that exceeds the capacity of one year’s profits to absorb it, then that bank will be looking at writing down capital.

“For the banks we cover, with the exception of Diamond Bank for whom we expect significant deterioration in capital in 2018 ending due to huge impairments, we estimate that all other banks will make sufficient profit to absorb impairments within the year and would not require any write down in capital,” it stated.

However, analysts at the firm were optimistic about the banking sector based on their current share prices.
Investment outflows from the Nigerian Stock Exchange in 2018 led to a significant moderation in the share prices of many banks despite improving fundamentals.

Specifically, the market closed the immediate past year with a decline of N1.898 trillion, while the NSE All-Share Index (ASI) had depreciated by 17.8 per cent.

The Chief Executive Officer of the NSE, Mr. Oscar Onyema, had disclosed that foreign investors pulled out N605.54 billion from the equities market in 2018 because of a shift to higher yielding assets with lower risks in developed countries, coupled with the perceived political risks in the forthcoming general elections.

Onyema had said the outflows last year was 50.53 per cent higher than the N402.26 billion repatriated by foreign investors the preceding year.

But analysts at CSL Stockbrokers in the latest report pointed out that at current levels, the valuation of bank stocks was still compelling.

“The recent economic recession made some sectors vulnerable such as oil and gas, manufacturing, general commerce and power.

“The fragile economic recovery resulted in a pick up in some sectors such as the oil and gas upstream sector however, a number of sectors remain vulnerable and legacy issues persist for many banks.

“While we do not expect any significant deterioration in the loan books of banks in 2019, we believe legacy issues will persist in many cases. Also, following Teleology’s withdrawal from the acquisition of 9Mobile, we are of the view that banks that have not taken sufficient provisions on Etisalat will need to take additional provisions in full year 2018.

“We believe that CBN will be actively mopping up liquidity in the money markets in order to alleviate pressures on the exchange rate. In our view, the CBN will prioritise exchange rate stability after the election and tolerate higher yields at the short end,” it stated.

The firm forecast an average loan growth of about 6.5 per cent for the tier one banks and average loan growth of about 10.7 per cent for the tier 2 banks.

They however noted that the emergence of a new President may trigger lending activities, even as they anticipated that yields would remain relatively attractive in 2019 as government continues to borrow locally despite plans to increase foreign borrowings given the fiscal imbalance brought about by increasing budget deficit.