Fitch Ratings has highlighted the strong foreign currency positions for Nigerian banks despite fluctuations in the naira exchange rate.
In a report released Wednesday, the global credit rating agency said foreign currency liquidity risks have not materialised, particularly in Nigeria but present a significant risk to banks’ ratings.
Fitch Ratings said the 2021 sector outlook for banks in Africa is stable as they see a gradual recovery with business volumes and revenue picking up.
It warned that Nigeria may likely witness an rise in impaired loans, especially in consumer and small and medium sized enterprises (SMEs) loans.
Also, the Central Bank of Nigeria (CBN) has introduced 90-day Special Bills to tackle the impact of excess liquidity in the banking system.
In a circular signed by its Director of Banking Supervision, Bello Hassan, the bank said the new fixed income assets was part of its efforts to deepen the financial markets and avail the monetary authority with an additional liquidity management tool.
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The regulatory bank, however, said “the instrument shall not be accepted for repurchase agreement transactions with the CBN and shall not be discountable at the CBN window.”
It said the instrument will qualify as liquid assets in the computation of liquidity ratio for deposit money banks.
According to Fitch Ratings, a loan is impaired when it is likely that a bank or lender will be unable to collect the full value due, including both interest and principal.
“The most likely scenario is the active restructuring of large corporate loans preventing a sharper hike in impaired loans,” the statement read.
“Such flexibility will not be afforded to consumer and SME loans and these segments will drive higher impaired loans over the longer term. Impaired loan ratios could head towards low double digits in some countries, particularly in Nigeria and Morocco.”
However, the agency also said that a return to pre- pandemic levels may not occur for at least two years as asset quality will deteriorate because of the challenges of the COVID-19 pandemic on households and businesses, coupled with the expiry of temporary debt-relief measures.
Fitch explained that despite large credit losses, most African banks would remain profitable as they still retain a healthy revenue generation capability, adding that rebuilding of earnings will be slower for South African banks.
Continuing, on liquidity control, the CBN said it will continue to ensure optimal regulation of systemic liquidity and promote efficient financial markets in support of economic recovery and sustained growth.
The apex bank currently deploys Treasury Bills and Open Market Operations (OMO) instruments to regulate system liquidity.
The bank also often debit commercial banks for Cash Reserves Ratio (CRR) as part of liquidity management instruments to reduce the impact of excess cash in the banking system and curb inflation.
The introduction of the new special bill have been informed by the ineffective nature of the existing instruments to help the regulator moderate the impact of liquidity in the system.
