Nigeria: Fitch Warns Proposed FX Gateway Bank Could Impact Nigerian Banks’ Liquidity

Fitch Ratings, a prominent credit rating agency, has expressed concern that the proposed foreign currency gateway bank announced by the Central Bank of Nigeria (CBN) could potentially have adverse effects on the liquidity of Nigerian banks. This assessment was detailed in the latest Fitch Ratings commentary focusing on Nigerian banks.

The announcement of the foreign currency gateway bank came directly from the CBN Governor, Dr. Olayemi Cardoso, who outlined plans to introduce this new entity as part of efforts to address the country’s ongoing forex challenges.

In a recent television interview, Cardoso explained that the CBN aims to establish a single foreign currency (FCY) gateway bank to consolidate all correspondent banking activities, a domain currently dominated by two major banks.

Reacting to this development, Fitch Ratings commented, “The proposed establishment of a FCY gateway bank by the CBN, as announced by Governor Olayemi Cardoso, along with the revelation that a recent audit invalidated $2.4 billion of overdue FX forwards, could potentially have negative implications for the foreign currency liquidity of the banking sector.”

Moreover, Fitch predicts a notable increase in impaired loans within the banking sector due to the significant devaluation of the local currency, which has depreciated by about 70% since the end of 2022. This devaluation is expected to accelerate the pace at which impaired loans (Stage 3 loans) accumulate, particularly given the inflation of FC-denominated problem loans in sectors like oil and gas.

Additionally, Fitch highlights the impact of a recent CBN circular prohibiting banks from maintaining net long foreign currency positions. This directive, aimed at bolstering the supply of foreign currency, is anticipated to contribute to a further moderate depreciation of the naira. Without the buffer of net long FC positions, banks’ capital positions become more vulnerable to currency fluctuations, although most banks are expected to maintain capital adequacy ratios above regulatory minimums.

The CBN’s efforts to harmonize various segments of the foreign currency market in June resulted in significant devaluation of the naira, which closed at 899/$ at the official market last year. As of February 13, the naira stood at 1,516/$, marking a 40% devaluation since the end of 2022.

While this move aims to attract capital inflows and alleviate forex shortages, it also poses short-term macroeconomic risks such as exacerbating inflation and further straining loan quality and capital adequacy within the banking sector.

Fitch’s assessment underscores the complexities and challenges inherent in navigating Nigeria’s evolving financial landscape amidst ongoing efforts to stabilize the currency and foster economic growth.