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Nigerian banks face Eurobond, forex loans repayment challenges on naira woes

By on December 9, 2020 0 173 Views

* Naira devaluation push up repayment value
* Capital base, assets quality threaten

Nigeria’s currency devaluation may further put pressure on the ability of the nation’s banking sector to repay Eurobonds and other external loans contracted earlier, a banking sector report by Afrinvest has stated.

Many Nigerian banks had few years back raised money from the international capital market to boost their capital and support local businesses in their quest for expansions.

But the Afrinvest Banking Sector Report for 2020, said the capital base of some banks by the devaluation of the local currency by the Central Bank of Nigeria (CBN).

The report stated that more banks are facing weaker asset quality while the industry Capital Adequacy Ratio is being pressured in the short term as a result of the naira devaluation.

The report said the devaluation of the naira would inflate industry foreign currency loans, which is dominated by the oil and gas, manufacturing, general commerce and other import-dependent sectors.

The report stated that the banking sector has also come under pressure due to the adoption of International Financial Reporting Standards (IFRS 9). The harsh operating environment resulting in higher non-performing loans and significant write-offs also did not help the lenders.

The report recommended that the industry would require a recapitalisation exercise in the short to medium term as hinted by the Central Bank of Nigeria (CBN).

It, however, said the currency environment and weak investors’ sentiment pose a big challenge to the exercise.

“The underpriced valuation of the banking sector many hurt banks seeking to raise tier-1 capital while tier-2 capital funding cost may be unaffordable to the current risk environment. The CBN directed that the minimum interest rate on savings deposit be reduced to a minimum of 10 percent of Monetary Policy Rate (1.25 percent), the previous minimum of 30 percent of MPR (3.75 percent) effective from September 1, 2020,” it said.

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The Afrinvest Banking Sector Report, savings deposits account for about 20 percent of the total industry deposit while commercial banks are expected to benefit in terms of a moderation in the overall cost of fund.

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“In the same vein, with 100 basis points drop in Monetary Policy Rate to 11.5 percent as well as the adjustment of the asymmetric corridor to +100/-700 basis points, banks with lower liquidity gap would enjoy lower cost from the CBN’s lending window, specifically the standing lending facility.

“On the growth loan book, it said that n 2020, analysts expect to see a sustained increase in the industry total loans as commercial banks comply with the CBN Loan to Deposit Ratio directive among others,” it said.

The downside risk is the asset quality deterioration which could hamper earnings growth and other key financial metrics such as Return on Equity and Return on Assets in 2020 and beyond.

On moderation in interest income, the report said the introduction of the minimum Loan to Deposit Ratio rate at 65 percent has spurred banks to engage in mild pricing wars resulting in lowering of lending rates.

Loan restructuring has dragged interest income lower while the punitive policies by the CBN including the Cash Reserve Requirement (CRR) debits would impact interest income as large pools of cash remains non-earning.

“We also note that the rates in the fixed income market have compressed significantly due to robust liquidity positions, thus driving yields on investment securities lower. In our view, we believe that non-interest income could be the major game changer for toppling growth in 2020 as interest income comes under pressure,” he said.

The CBN has adjusted the value of the local currency thrice this year in a bid to curb speculations on the naira and conserve foreign exchange reserves.

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