Nigerian banks may need to boost capital levels by up to N360 billion this year, to meet tougher international rules set by the Basel Committee on Banking Supervision.
The Central Bank of Nigeria (CBN), which is the banking sector regulator, published two new circulars in December 2013 indicating that it expects banks to begin adopting elements of Basel II and III relating to market and operational risk.
“We estimate that compliance with the Basel requirements on operational risk will result in a reduction of at least 250 basis points (bps) for our universe of (9) banks,” said FBN Capital in a report released on Monday, January 20.
“If the banks decide to completely offset this by raising additional capital, we estimate around N40 billion ($250 million) on average will need to be raised by each bank.”
The capital requirements relating to market risk are, however, uncertain for now since few Nigerian banks publish their value at risk (VAR) – (the largest loss likely to be suffered on a portfolio position over a holding period) – making the determination of the market risk impact on the capital adequacy ratios (CAR) calculations difficult, according to FBN Capital.
Figures obtained from those banks that do publish their VAR show that the impact of market risk on capital requirements would be modest, meaning operational risk would have a much greater impact on CAR.
Global regulators are weighing tougher constraints on how banks measure the risk of losses on their investments in a bid to prevent them from downplaying the capital they need to guard against insolvency.
Nigerian banks had core capital reserves averaging about 18.1 percent of their risk-weighted assets at the end of 2012. Banks with international operations are required by the CBN to meet a minimum CAR of 15 percent.
The push by the CBN for banks to begin complying with Basel requirements will add to other regulatory actions that may squeeze bank profits this year.
Nigerian banks fell on Wednesday after the CBN increased the cash reserve ratio (CRR) on government deposits to 75 percent from 50 percent, which “implies a mop-up of around N657 billion”, according to Samir Gadio, emerging markets strategist at Standard Bank, London, in a note released January 21.
The need to shore up capital as a result of the CBN circulars has consequences for dividends and loan growth, said FBN Capital.
Skye Bank has stated that it expects to raise additional funds via debt ($150 million loan) in first quarter 2014 and equity in half-year 2014 (size not specified), while Diamond Bank shelved its capital raising programme in Q3 2013.
“Any potential capital raising plans will most likely impact loan growth. Some banks revised (down) their loan growth guidance in 2013…. Management of some banks may decide to reduce their dividend payout ratios,” FBN Capital said.
International standards set by the Basel Committee demand that banks meet minimum capital requirements, measured as a percentage of their assets. The amount of capital that must be held is linked to the riskiness of the assets.
“Basel II and III requirements by the regulator is an alignment of Nigerian banks with the international sector,” said Samira Mensah, associate director, financial institutions ratings at Standard & Poor’s, in an interview with BusinessDay.
She projected that the short credit cycle in Nigeria (average maturity of 18 months) would lead to volatility in assets, adding: “We may see credit issues emerge fairly quickly.”
By:
PATRICK ATUANYA
