For more than one week after the International Monetary Fund (IMF) advised the Central Bank of Nigeria (CBN) “to contain rising banking sector risks,” the apex bank is yet to response.
However, even as the CBN is yet to react, several financial analysts have started making inputs concerning the IMF stand on the average health of Nigerian banks in terms of risk containment.
According to IMF in its report released after its Article IV Consultation visit to Nigeria, it advised the CBN to carry out an asset quality review to identify any potential capital need.
The IMF was quick to hail the CBN’s commitment to help increase capital buffers by stopping dividend payments by weak banks, stressing that rising banking sector risks should be contained through enhanced risk‑based banking supervision, strict enforcement of prudential requirements, and a revamped resolution framework.
In his reaction, the Chief Executive Officer of Financial Derivatives Limited, Mr. Bismarck Rewane, said “I agree with the IMF that there is a need to adopt a unified exchange risk, it is important. However, there is a need to reduce the policy rate to boost growth. Growth is important to us now”.
In his submission, Rewane averred that the IMF was privy to the banks’ books and therefore the advice on the need to enforce prudential guidelines, carry asset review and revamp resolution framework must be examined.
Commenting on issue, another finance analyst and chief executive of Cowry Asset Management Limited, Mr. Johnson Chukwu, noted that “There are a number of banks whose situations are being allowed to linger. They create uncertainty. The CBN must evolve a definitive time-bound resolution strategy that will make it possible for it to supervise an orderly exit of some weak entities if it becomes imperative”.
To the Managing Director of Afrinvest Securities, Mr. Ayodeji Ebo, “The CBN needed to compel banks to train its personnel in order to have a deep understanding of sectors with significant loan portfolio,” stressing that “The CBN needs to fortify its bank examination team to identify potential risks in banks’ books before they crystalise.”
Industry observers are of the view that the inability of banks in recovering Non-Performing Loans (NPLs) over the years is impacting negatively on their books and ability to drive growth in the sector.
Already, a recent unannounced stress test conducted by the apex bank, has shown that only large banks will stay above the regulator’s capital adequacy ratio threshold if the non-performing loans levels of the Deposit Money Banks should rise by 50 per cent.
The results of the end-June 2017 banking industry stress test which were contained in the CBN’s latest Financial Stability Report posted on its website, looked at 20 commercial banks and four merchant banks on their resilience to credit, liquidity, interest rate and contagion risks (shocks).
Business Hilights recalls that Nigeria’s banking industry was categorised into large banks (those with assets up to N1tn or above); medium banks (those with assets more than N500bn but less than N1tn); and small banks (those with assets up to N500bn or below).
According to the CBN’s stress test result as posted on the website, “The stress test showed that only large banks could withstand a further deterioration of their NPLs by up to 50 per cent. However, none of the groups withstood the impact of the most severe shock of a 200 per cent increase in the NPLs as their post-shock CARs fell below the 10 per cent minimum prudential requirement.
“The impact of the severe shocks on the banking industry, large, medium and small banks will result in significant solvency shortfall of 15.21, 9.78, 93.42 and 17.53 percentage points from the regulatory minimum of 10 per cent CAR, amounting to N2.77tn, N1.54tn, N0.98tn and N0.25tn, respectively.”
The apex bank noted that the average baseline Capital Adequacy Ratios for the banking industry, large, medium and small banks at the end of June 2017 stood at 11.51, 13.13, -6.71 and 13.54 per cent, respectively.