In the event of a further 50 percent devaluation in the naira, only two out of tier 1 banks would have Capital Adequacy Ratio (CARs) above 16 percent regulatory minimum, according to Renaissance Capital.
The banks which also fall into the category of systemic important banks are Access Bank plc and Zenith Bank international plc.
“If we factor in revaluation gains from a devaluation, this should also provide GTBank and UBA with sufficient capital buffers. If we see a more marked devaluation in FY17, the CBN could explore the option of allowing the banks to use pre-devaluation FX rates in calculating prudential ratios – similar to what happened in Russia in 2014”, analysts at RenCap said.
According to Rencap, he key themes for the Nigerian banking sector continue to revolve around: the currency; asset quality trends; and pressured capital levels.
According to the firm, the outlook is mostly dependent on decisions made around the currency. On February 20, 2017 the CBN introduced some foreign exchange policy actions.
“We think these measures are a move in the right direction, but as we expected they fell short of a full liberalisation. The CBN plans to use the $5 billion in foreign exchange reserves it has built up (via a deliberate policy of building up reserves since November) to increase liquidity in the interbank market and make forex available for retail transactions including travel allowances and school and medical fees.
This will affect about 20 percent of forex transactions, according to, Yvonne Mhango, Economist at Renaissance Capital. The CBN had introduced forex flexibility with respect to retail transactions by allowing them to take place at a forex rate not exceeding 20 percent above the interbank forex rate. We take this to mean that retail transactions can be settled at any rate in the NGN315-380/$ rang.
While the analysts think this will provide much-needed short-term forex liquidity relief for the banks, it does not necessarily address all the current issues. Foreign exchange policy remains interventionist, with the CBN still providing guidance on the forex rate. Furthermore, the CBN will remain the biggest supplier of liquidity on the interbank market.
There was no mention of restoring a foreign exchange market where banks trade on a two-way quoting basis, whereby banks are free to buy from all forex sellers and sell to their customers at market rates for price discovery. There could also be some potential upside from commission income from the sale of foreign exchange to retail clients, as the banks are allowed by the CBN to charge a spread. However, we think the CBN is likely to sell to the banks at a rate closer to the 20 percent band, consequently limiting how much the banks can make on such transactions.
HOPE MOSES-ASHIKE
