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With the Basel III accord implementation, Nigerian banks are more likely to reduce their appetites for creating credits and dividend payout may not be as juicy as lenders would require funding to meet their regulatory capital requirements.
Nigeria Banks began the implementation of specific guidelines from Basel III, a requirement that started in November 2021 according to the Central Bank (CBN) circular.
The implementation of the accord seeks to strengthen Nigerian banks capital position and one of the key requirements is demand for common equity Tier 1 capital (CET1) – a component of Tier 1 capital mostly equity.
In the notice to the banks, CBN had hinted that banks will undergo a parallel run for six months with the possible addition of three months, during which the new guidelines will run concurrently with existing Basel 2 guidelines.
The existing guideline shows that deposit money banks classified as international banks, domestic systemically important banks had had to meet only a minimum total capital adequacy ratio of 15%, while national banks met 10%.
However, with these new rules brought forward by the Basel III accord, there will be minimum requirements at several levels of capital, and all banks will be required to hold a capital conversation buffer of 1%, in the form of common equity capital, according to Tellimer analysts’ note.
For systemically important banks, an additional 1% of common equity capital is required for higher loss absorbency, analysts explained further. Basel III accord implement may however demand that banks shareholders kiss dividend raise goodbye even with the industry’s better than anticipated earnings growth following the lockdown initiated in 2020
In a briefing, Renaissance Capital said the implementation of Basel III should see the minimum regulatory capital ratio rise to a base of 17% from 15% for system important banks (SIBs).
The frontier and emerging market investment bank said this would likely spur capital raises and lead banks to be more conservative on loan growth and dividend pay-outs near term.
“Ahead of this, we saw Access bank raise a $500 million additional tier one Eurobond which RenCap advised on”. In its estimates, Rencap sees net interest margin (NIM) in the banking sector contracting.
The firm hinted that NIM pressure has been a major theme in 2021 due to the low-interest rate environment, high effective cash reserve ratio (CRR) at the banks and low yielding CBN special bills.
CBN has maintained a habit of debiting banks for failing to meet the 65% loan to deposit ratio target, a move the apex bank initiated as part of efforts to grow the real sector of the economy.
However, asset quality in the banking sector has remained impressive despite the pandemic induced pressure on loans following the regulator forbearance for credit restructuring.
“Industry-wide non-performing loans (NPL) ratio improved to 5.3% as at October 2021, from 5.7% in October 2020 and 6.59% in January 2020, which was supported by the country’s economic recovery, a large round of restructuring which was supported by the CBN, and the banks coming into this crisis with a better understanding of oil and FX-related risks following crises of recent years”.
Commenting on the equity market performance of the Nigerian banks, which some critics say is less rewarding despite the year on year earnings growth, Rencap said the main factor that will drive a re-rating of banking equities is CBN’s policy decisions particularly with respect to the exchange rate and capital controls.
“Nigeria remains a significant underweight in the equity portfolio of the majority of our international clients and only those who have capital stuck in the country have been participating, but we have not seen much new capital being allocated to Nigeria given the CBN’s capital controls and exchange rate policy”.
Following a turbulent 2020 on the macro front, 2021 saw Nigerian banks recovering from their third economic crisis in just over a decade, RenCap said at a press briefing.
It added that this presented a difficult operating terrain for Nigerian banks to navigate, plagued by weak macro conditions, contracting margins, intensifying competition and lingering asset quality concerns.
Including the buffers, Tellimer analyst Busola Jeje hinted that the prospective framework will require Systemically Important Banks to have a common equity tier 1 ratio of 12.5% and a total capital adequacy ratio of 17%.
Banks such as Fidelity Bank, FCMB and Union Bank have an international authorisation, and will be expected to comply with a minimum CET1 of 11.5% and capital adequacy ratio of 16%, analysts said.
National banks which include Wema Bank, Sterling Bank and Stanbic IBTC (the banking subsidiary), and are expected to have a CET1 of 8% and CAR of 11%, Tellimer analyst Busola Jeje said in the note.
“All the banks meet the CET1 criteria, although FBNH is the closest to its expected minimum threshold. For the second criteria, FBNH falls short with its current CAR at 16.8% as against 17% expected when the guidelines become effective”, Tellimer said.
Analysts said FBNH is the most exposed in terms of meeting the new capital guidelines, given its lower capital position in relation to peers.
In addition to capital requirements, the CBN will apply a cap on the maximum amount of dividends that can be paid to both common equity and additional tier 1 capital providers, according to Tellimer’s note.
However, it said the ceiling will depend on a combination of four factors which include the banks’ NPL ratio, CET1 ratio (including buffers), leverage position and a composite risk rating which is solely determined by the CBN.
Analysts said one of the CBN’s goals with the new guidelines is to constrain the build-up of excessive on and off-balance sheet leverage by the banks.
Going forward, analysts said Nigerian banks will be required to compute leverage ratios, which consider a capital measure (solely tier 1 capital) over an exposure measure (on and off-balance sheet exposures, derivatives, and securities-backed transactions).
The minimum for all banks would be 4%, but systemically important banks would be required to have a minimum of 5%, according to Jeje.
“By our own calculations, all the banks met the expected minimum, although UBA and FBNH were dangerously close to the minimum. As a result, we expect these banks to reduce their exposure or raise tier 1 capital to provide an adequate gap to the regulatory minimum”, Tellimer said.
Under Basel III, in the short to medium term, the Nigerian banking sector should be equipped with better capital quality, stronger levels of capital and robust liquidity positions.
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