In a bid to salvage the disturbing macroeconomic indicators; dwindling reserves, FX volatility and impairing government revenue – as a consequence of falling oil prices, the MPC decided in its last meeting for the year to increase CRR to 20 percent from 15 percent, increase MPR to 13 percent from 12 percent and the naira exchange rate has been devalued by 8 percent to N168 and the band widened to +/-5 percent from +/-3 percent.
As oil price decline enters a new normal and the subsequent hike in the monetary policy rate (MPR) by one percent which is the highest the MPR has been since the global financial crisis of 2009, Nigerian banks cost of risk is estimated to rise by 0.4 percent in 2015, according to Rencap.
This was also backed up by recent Renaissance capital report on Nigerian banks: The nature of growth and risk.
According to the report, “Pressure on banks’ capital ratios should intensify given the bigger FX loan book today, which expands nominally post valuation, without a commensurate adjustment on the capital side which naira denominated.”
“Private sector CRR hike to 20 percent from 15 percent is negative for banks’ Return on Assets (RoAs) and credit growth,” added Adesoji Solanke, a Renaissance Capital SSA bank analyst.
The price of oil peaked at $115 per barrel in June but since then, has been on a steady decline, dropping to $70 per barrel in November which is more than 30 percent decline with the possibility of further downside pressure given the recent organisation of petroleum exporting countries (OPEC) decision not to cut output.
The naira has been under pressure for weeks, the currency weaken 9.1 percent this quarter, the most in Africa after Malawi’s kwacha.
Nigeria foreign reserves fell to $36.7 billion on December 1, the lowest level since August 2012.
“The public sector CRR was maintained at 75 percent. At these levels, we estimate the banking sector’s blended CRR moves to 33 percent, from 29 percent previously, based on currently available system data,” said Rencap.
“This is negative for growth in risk assets, in our view, more on the naira side, as the CRR does not affect FX deposits or other liabilities,” the report said.
According to Fitch ratings, the naira move impact is limited for banks, but FX risks are high.
“The devaluation will be a drag on capital ratios as risk-weighted assets of foreign currency loans rise. But we expect this negative drag to be modest and largely offset by revaluation gains from long FX positions and retained earnings,” Fitch said in a note released last week.
Rencap also says this time Nigerian Banks have learnt a number of lessons from the last crisis and have improved their risk management structures in downstream oil and gas lending.
Oil and gas lending made up to 7.8 percent of all banks loans and 10.6 percent of Non Performing Loans (NPLs) in Rencap universe of 10 banks under cover at nine months 2014.
The recent surge in banks US dollar debt funding and lending, leaves bank more vulnerable to FX risks, particularly if there is further devaluation of the currency.
Nigeria banks have raised funding internationally over the last year, made possible by stronger investor appetite for Nigerian debt.
The yields in Nigeria’s Eurobond due in July 2023 jumped to a nine month high of 6.13 percent on December 1.
“The current downturn in oil prices is not transitory but appears to be permanent, being a product of technological advances,” according to Godwin Emefiele, Governor, Central Bank of Nigeria (CBN) in an address to journalist during the presentation of the monetary policy (MPC) meeting report in Abuja.
JOSEPHINE OKOJIE
