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3 factors that compelled 3 commercial banks to fail latest CBN’s solvency test

Three banks, two among them highly rated (names with held) have failed stress test conducted by the Central Bank of Nigeria (CBN).

Three major factors that collapsed the asset quality and strength of the banks include negative Gross Domestic Product (GDP) growth, rising inflationary trend, and the depreciation of the naira.

Analysts say the listed factors are very critical in the stability of a bank, but another factor that aided their current risky status cannot be unconnected with galloping Non-Performing Loans (NPLs).

The result showed that the Capital Adequacy Ratios (CARs) of the three big banks have fallen below regulatory capital requirement, and as such are now potential for high contagion   risk   through   unsecured   interbank   exposure.

The CBN said economic crisis adversely impacted borrowers, resulting in rising NPLs which required additional provisioning by banks, thereby reducing the banks’ CAR.

A source at the Lagos Office of the apex bank confided in Business Hilights that Implied Cash Flow Analysis (ICFA) and Maturity Mismatch/Rollover Risk methods were the testing models used for the test to assess and codify the banks in terms of their resistance to both liquidity and funding shocks.

However, CBN was quick to aver that the decline  of  the  CAR  of small  and  medium  banks  did  not  weigh  significantly  on  the  industry CAR  because  large  banks  hold a  significant  proportion  (88.02 per cent)  of  total  banking  industry loans.

The not so good development is part of the latest Financial Stability Report, released by the CBN Governor, Mr. Godwin Emefiele. The report further explained the scenario and classified banks into three groups: large banks, those with assets greater than or equal to N1 trillion; medium banks with assets greater than or equal to N500 billion but less than N1 trillion and small banks with assets of less than N500 billion.

The CAR is a ratio of bank’s assets to its risks and is 10 per cent for national banks and 15 per cent for banks with international subsidiaries and 16 per cent for Systematically Important Banks (SIBs). It said the baseline CAR for the banking industry, large, medium, and small banks stood at 14.78, 15.47, 12.75 and 3.14 per cent, respectively.

Though the report came out relatively late, the industry stress test was carried  out  December  2016 and all 23 commercial  and merchant  banks were examined along the lines of their resilience  to credit,  liquidity, interest  rate and  contagion  risks.

The test showed that after a one-day run, the liquidity ratio for the industry declined to 30.2 per cent from the 44.4 per cent pre -shock position and, to 9.73 per cent and 6.76 per cent after  a five-day  and cumulative  30-day  run,  respectively.

Accordingly, a five-day  and  cumulative 30-day  run  on  the  banking  industry  would  result  in  liquidity  shortfalls of N2.1 trillion  and N2.3 trillion, respectively.

Generally, the CBN stress test indicated that the ratio of non-performing loans (NPLs) to gross loans deteriorated by 2.3 and 8.7 percentage points to 14 per cent   compared with the levels at end-June 2016 and end-December 2015, respectively.

Total banking industry credit access on a sector by sector basis presented the oil and gas sector as the highest standing at 29.59 per cent. Manufacturing, general commerce, government and others, followed suit in that order of 13.41, 8.71, 6.25, 8.34 and 33.70 per cent, during the test.

Another test is expected before the end of second quarter. Industry pundits say if the technically failed banks fail to shore up their resilience before the next test run, CBN may takeover to avoid loss of depositors’ fund.

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