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Fitch Ratings has expressed confidence that most Nigerian banks will meet higher capital and liquidity requirements given a healthy metric in the sector. Nigerian banks metrics, according to the global rating agency, appear better than the previous crisis.
In November 2021 the Central Bank of Nigeria (CBN) begins the implementation of the Basel III accord, an international set of measures developed by the Basel Committee on Bank Supervision of the Bank of International Settlement in response to the financial crisis that happened between 2007 and 2009.
The measures, according to Basel Committee, aim to strengthen the regulation, supervision and risk management of banks.
The apex bank had informed Nigerian banks about the commencement of the implementation of the accord, a gradual rollout, which is expected to run for 6 months in parallel with exiting guidelines, before finalisation.
The long-delayed implementation of Basel III is expected in 2022 with the introduction of minimum requirements for common equity Tier 1, Tier 1 and Total Capital Adequacy as well as capital buffers, the global rating agency said in a recent report.
“We are confident that most banks will meet the higher capital (and liquidity) requirements given already healthy metrics”, it said. However, the global rating agency said moderate pressure on capitalisation will come from an increase in dividends and risk-weighted assets.
Some investment banking analysts however told MarketForces Africa that the implementation of the accord could see banks shareholders dividend expectations unmet in 2021 as lenders scramble for funding.
At a press briefing, Renaissance Capital hinted that Nigerian banks loan appetite may drop, and the frontier and emerging market investment bank expects some level of conservation in dividend payments.
“The adoption of Basel III by the Central Bank of Nigeria, with new guidelines in place, has effectively created a new capital instrument in the form of Additional Tier 1 debt.
“Renaissance Capital successfully partnered with Access Bank on the first Additional Tier 1 issue from Nigeria, and we expect this non-dilutive form of capital to be embraced by banks across both foreign and local currency markets”, Samuel Sule, Acting CEO, Nigeria, Renaissance Capital said.
Confirming Renaissance Capital position, Fitch Rating said in the report that deposit growth will continue to outpace loan growth, ensuring healthy local-currency liquidity.
“Banks will face tightening local currency liquidity at times of cash reserve ratio (CRR) debits. With FX shortages expected to persist, banks will continue to rely on internal resources”, according to Fitch note.
Banks that are able to tap external funding will see the cost of borrowing rise due to global factors, it added.
On the macroeconomic development, it was noted that business volumes and earnings will continue their slow trend recovery in 2022, driven by moderate loan growth buoyed by gradually improving operating conditions.
Fitch forecasts real gross domestic product (GDP) growth of 2.8% in 2022 compared to 2% in 2021F and minus 3.0% in 2020.
“We assume 15% sector loan growth in 2022, reflecting rising demand, currency devaluation and regulatory requirements for banks to extend loans to priority sectors”
The report listed downside risks to include Nigeria’s exchange rate regime and persistent hard currency shortages, high inflation and regulatory intervention, particularly the Central Bank of Nigeria (CBN) continuing its policy of ad hoc cash reserve requirement (CRR) debits.
However, it said stabilising operating conditions are hugely positive for asset quality in the banking sector, saying Fitch analysts do not anticipate a spike in impaired loans when remaining debt relief measures expire in March 2022.
“We forecast an impaired loan ratio of around 6% at end-2022, considerably lower than in previous crises”.
The rating agency estimated that loan restructuring will remain prevalent and banks will be supportive of their prime corporate customers.
It also hinted that shocks to oil sector lending have been avoided with global prices stabilising, but the sector remains highly vulnerable to a prolonged period of low prices and production cuts.
On the regulatory side, Fitch Ratings said in the report that a modest rate hike is likely in 2022, which will boost operating income.
Banks will remain profitable with strengthening revenue and the easing of credit costs, according to Fitch note.
Non-interest income will continue to benefit from currency revaluation gains and trading income as well as solid fee income, it added.
“To some extent this will be offset by the opportunity cost of ad hoc CRR debits by the central bank, intensifying competition and large regulatory costs.
“The extent of the decline in profitability will largely depend on credit costs over the next few quarters”, Fitch said.
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