The devaluation of the naira against global currencies will impact negatively on foreign currency loans and weaken capital base for the lenders, banking sector report has shown.
The Afrinvest Banking Sector Report for 2020 says the capital base of the Nigerian banking sector has also come under pressure due to the adoption of International Financial Reporting Standards (IFRS9). The harsh operating environment resulting in higher non-performing loans and significant write-offs also did not help the lenders.
Also, due to the naira devaluation and weaker asset quality industry Capital Adequacy Ratio is being pressured in the short term.
The report said 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 analysts advised that the industry would now require a recapitalisation exercise in the short to medium term as hinted by the Central Bank of Nigeria.
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 too a minimum of 10 per cent of Monetary Policy Rate (1.25 per cent) , the previous minimum of 30 pr cent of MPR (3.75 per cent) effective from September 1, 2020,” it said.
CBN Governor Godwin Emefiele had unfolded his policy direction for the second term of five years, with recapitalisation of banks topping the list.
Under the impending exercise, banks will raise their capital base above the N25 billion minimum level adopted in 2004.
The CBN guidelines stipulate that regional banks must have a minimum paid-up capital of N10 billion, national banks, N25 billion and banks with international operations N50 billion.
According to Emefiele, the 2004 recapitalisation, which increased banks’ capital base from N2 billion to N25 billion, has weakened. He plans to pursue a programme that will make the banks rank among the top 500 in the world.
On devaluation, CBN had last month devalued the naira by N6 to dollar. The naira devaluation brought the local currency closer to the exchange rate unification agenda of the apex bank as recommended by the International Monetary Fund (IMF) and World Bank.
In a weekly exchange rate for disbursement of proceeds of International Money Transfer Service Operators (IMTOs) for November 30, 2020, all authorized dealers, Bureau De Change (BDC) Operators and Service Providers were advised to add N6 across all rates.
The new rates pegged IMTOs sale of dollar to banks at N388 to dollar, higher than previous rate of N382 to dollar; banks sale of dollar to CBN at N389 to dollar, as against previous rate of N383 to dollar.
Also, CBN sale of dollar to BDCs was pegged at N390 to dollar, as against previous rate of N384 to dollar. The BDCs are directed to sale to end-users at not more than N392 to dollar, as against previous rate of N386 to dollar.
According to the Afrinvest Banking Sector Report, savings deposits account for about 20 per cent of the total industry deposit while commercial banks are expected to benefit in terms of a moderation in the overall cost of fund.
“In the same vein, with 100 basis points drop in MPR TO 11.5 per cent 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 ( 65 per cent), which carries a penalty for defaulters, has prompted banks to engage in mild pricing wars resulting in lowering of lending rates. Similarly, loan restructuring has dragged interest income lower while 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.
