The implementation of Basel III scheduled to take effect by the end of 2018, is likely to be delayed as the Central Bank of Nigeria (CBN) keeps its focus for now on the implementation of International Financial Reporting Standard 9 (IFRS 9), according to a leading emerging and frontier markets investment bank, Renaissance Capital.
Basel III is a global regulatory framework designed to regulate, supervise and manage risk in banking sector. Implementation of Basel III started globally in January 2013 and is expected to be completed in 2018.
“We gather from our meetings that the implementation of Basel 3, scheduled to take effect by the end of 2018, is likely to be delayed. According to the banks, the CBN’s focus has been on the implementation of IFRS 9, and that will likely take priority this year. For most banks, the impact of IFRS 9 has been fully accounted for in the 1Q18 results,” Renaissance Capital analysts led by Olamipo Ogunsanya said in a May 23 research note to clients.
In his reaction, Ayodele Akinwunmi , head of research, FSDH Merchant Bank Limited, said the implementation of IFRS 9 does not disturb the implementation of Basel rather the two can be done together.
He said the provision of Basel 3 and the local regulation are being implemented by the banks already.
The CBN in December 10, 2013 issued a circular for the implementation of Basel II/III in, which it specified approaches for quantifying the risk weighted assets for credit risk, market risk and operational risk for the purpose of determining regulatory capital.
At the time the circular triggered most banks to action to start considering options and strategies to comply. “From our experience, the cost, time, resources, expertise and the implementation process could be very significant and prone to risks if not done right,” analysts at Deloitte said.
However banks attention was diverted to the implementation of the IFRS 9 with effective date of January 1, 2018.
Ayodeji Ebo, managing director of Afrinvest Securities limited noted that the Basel 3 provisions focuses more on testing the Capital Adequacy Ratio (CAR) of banks and that the CBN has made some policies on dividend pay-out by banks which would help the banks.
Renaissance Capital, an investment banking firm, had in an investment note expressed the opinion that banks, could see Cost of Risk (CoR) come in marginally higher at the end of their 2018 financial year as a result of the adoption of the new standard.
However, Renaissance Capital noted that the operating environment still favours the big banks as their top picks are Guaranty Trust Bank, which they put at buy with a target price of NGN52.6 and United Bank for Africa to buy at target price of NGN15.3.
GTB closed trading Thursday at N42.80 per share, while UBA closes at N11.15 per share.
RenCap analysts believe the Nigerian banking sector is slowly returning to stability, but asset quality issues and the declining yield environment remain a challenge.
Meanwhile Geometric power and by extension Diamond Bank could see some relief in coming months as RenCap said feedback from its recent conference revealed that a development finance institution (DFI) is willing to invest a significant amount of money in Geometric, which should happen by the end of August, 2018.
Diamond Bank recorded a jump in its NPL ratio in FY2017 and the first quarter of 2018 was due to a major exposure to the power sector (Geometric).
An additional impairment charge of NGN3.1bn was made on Geometric, but the greater impact was the NPL ratio spiking to 15 percent.
Diamond has made a 22 percent provision on its Geometric loan and written down the value of its equity investment in Geometric.
HOPE MOSES-ASHIKE
