The quality of assets in the banking sector deteriorated in the first half of 2015, compared with the position at the end of December 2014. The ratio of non-performing loans (NPLs) to Gross Loans increased by 1.77 percentage points to 4.65 percent at end-June 2015.
The fall in asset quality could be attributable mainly to the devaluation of the naira and the rising inflationary trend according to the financial stability Report released by the Central Bank of Nigeria (CBN). While the naira exchange rate has fallen from N169.69/US$ in December 2014 to N196.91/US$ at end-June 2015, headline inflation rose from 8.0 per cent at end- December 2014 to 9.2 per cent in June 2015. These adverse macroeconomic developments increased the cost of production for most businesses; thereby, curtailing their capacity to service outstanding obligations. The ratio of core liquid assets to total assets decreased by 0.7 percentage points to 10.7 per cent at end-June 2015 from 11.4 per cent at end-December 2014. Also, the ratio of core liquid assets to short-term liabilities decreased by 0.90 percentage points to 15.8 per cent at end-June 2015 as compared with 16.7 per cent at end- December 2014.
However, most indicators of capital adequacy showed marginal improvement. The ratio of regulatory capital to risk weighted assets stood at 17.52 per cent at end-June 2015, showing increases of 0.3 and 1.1 percentage points above the levels at end-December 2014 and end-June 2014 respectively. Similarly, the ratio of tier 1 capital to risk weighted assets, which stood at 16.3 per cent at end-June 2015 was 0.8 and 0.2 percentage points above the level achieved at end- December 2014 and at end-June 2014, respectively.
The industry ratio of non-performing loans (net of provisions) to capital increased to 11.9 per cent at end-June 2015 from 4.1 per cent at end-December 2014, showing increased vulnerability to credit risk.
The CBN ‘a report revealed that there was an improvement in the baseline (Capital Adequacy Ratio (CAR) of the Nigerian banking industry at end-June 2014 compared to the December 2014 position. The baseline CAR rose by 0.23 percentage point over the December 2014 position to 17.38 per cent at end-June 2015. This was driven mainly by improvements in the baseline CAR of the large banks which rose by 1.03 percentage points over their December 2014 position to 18.56 per cent at end-June 2015. Equally, the number of banks with CAR greater than the 15 per cent prudential hurdle rate for international banks increased from 13 at end-December 2014 to 16 at end-June 2015.
However, the number of banks with CAR less than 5 per cent also increased from 0 to 3 over the period. The three banks are not among the domestic systemically important banks (D- SIBs).
Liquidity ratio (LR) of the Nigerian banking industry decreased by 6.5 percentage points to 39.3 per cent from the 45.8 per cent December 2014 position. The decline in the LR position was driven mainly by the large and medium banks with 6.5 and 7.4 percentage points decrease respectively from their December 2014 LR position to 36.9 per cent and 45.5 per cent respectively. This decline may be traced to the sustained tight monetary policy stance of the CBN.
Furthermore, the number of banks in the LR bucket greater than 40 per cent decreased from 18 as at December 2014 to 12 in June 2015. On the other hand, the number in the LR bucket less than 40 per cent but greater than 30 per cent and less than 30 per cent but greater than 20 per cent increased from 4 to 8, and 1 to 2 respectively.
HOPE MOSES-ASHIKE
