Whereas three banks (names with held) were said to vulnerable by the latest result of the stress test conducted by the Central Bank of Nigeria (CBN), the report however, singled out Zenith bank and declared it rock solid even in the face of recession.
According to the report, Zenith Bank is leading other big lenders in standing tall in all ramifications of the stress test.
The apex bank’s stress test focused on the ability of banks’ capital adequacy ratios to withstand a number of impairments arising from Non-Performing Loans and Fitch noted in its analysis that small banks were particularly badly hit in the stress tests.
CBN decided to keep the identities of the three near insolvent banks on its chest to avoid customers rush for withdrawal which will further kill the ailing banks.
Fitch Rating had relied on the Financial Stability Report for December 2016, in its review of the regulatory test highlighted disparities in capital strength in the Nigerian banking industry. The apex bank’s test showed that 3 banks failed, with their capital adequacy ratio haven significantly fallen below the regulatory requirement.
According to Fitch, “… medium and large banks collectively could withstand a 100% increase in non-performing loans (NPLs) but small banks (assets less than NGN500 billion) would struggle to withstand even modest NPL deterioration.
“In our own assessment of the banks we rate, which are mostly large with assets more than NGN1 trillion, the capacity to absorb losses through capital varies considerably.
“Zenith Bank Plc is stronger than the rest, while capital weaknesses at First Bank National and Diamond Bank have a significant influence on their ratings,” it added.
“All Nigerian bank ratings are in the highly speculative ‘B’ range, but even so capitalization is an important differentiator.”
“The scores we assign, based on capitalization and leverage metrics across the sector, are low, but vary considerably,” the agency averred.
Continuing, Fitch said “They already had very weak starting capital positions, with an average capital adequacy ratio (CAR) of just 3.14% at end-2016, following sharp falls in 2016 due to rises in NPLs. Medium and large banks had stronger starting positions, with CARs of 12.75% and 15.47%, respectively, at end-2016”.
The CAR is the ratio of bank’s assets to its risks. It is placed at 10 per cent for national banks and 15 percent for banks with international subsidiaries and 16 per cent for Systematically Important Banks (SIBs).
“CBN figures show that NPLs represented 14% of total sector loans at end-2016, a very sharp increase on 5.3% at end-2015. Unreserved NPLs represented a high 38.4% of total end-2016 regulatory capital (end-2015: 5.9%), signaling considerable weakening in the overall capital position of Nigeria’s banking sector.
“Reported NPL ratios do not tell the whole asset quality story. Restructuring, particularly of loans extended to the troubled upstream oil sector, is fairly common practice in Nigeria, and restructured loans at some rated banks account for as much as 20% of total loans,” Fitch summed.