It made reference to the CBN Financial Stability Report for December 2016, published recently, that showed that medium and large banks collectively could withstand a 100 per cent increase in non-performing loans (NPLs) but small banks (assets less than N500 billion) would struggle to withstand even modest NPL deterioration.
“In our own assessment of the banks we rate, which are mostly large (assets more than N1 trillion), capacity to absorb losses through capital varies considerably. Zenith Bank Plc is stronger than the rest, while capital weaknesses at First Bank and Diamond Bank have a significant influence on their ratings.
The scores we assign, based on capitalisation and leverage metrics across the sector, are low, but vary considerably,” Fitch added.“All Nigerian bank ratings are in the highly speculative ‘B’ range, but even so, capitalisation is an important differentiator.
The CBN stress tests assessed the ability of banks’ capital adequacy ratios to withstand a number of credit shocks. These include a general rise in NPLs, specific deterioration among banks’ five largest obligors and defaults in the oil and gas loan portfolios.
“As a group, small banks were particularly badly hit in the stress tests. They already had very weak starting capital positions, with an average capital adequacy ratio (CAR) of just 3.14 per cent at end-2016, following sharp falls in 2016 due to rises in NPLs.
“Medium and large banks had stronger starting positions, with CARs of 12.75 per cent and 15.47 per cent, respectively, at end-2016,” it added.
CBN figures showed that NPLs represented 14 per cent of total sector loans at end-2016, a very sharp increase on 5.3 per cent at end-2015.”
It noted that unreserved NPLs represented a high 38.4 per cent of total end-2016 regulatory capital (end-2015: 5.9%), signalling considerable weakening in the overall capital position of Nigeria’s banking sector. “Reported NPL ratios do not tell the whole asset quality story.
Restructuring, particularly of loans extended to the troubled upstream oil sector, is fairly common practice in Nigeria, and restructured loans at some rated banks account for as much as 20 per cent of total loans.
“Not all restructured loans will go bad, but in our opinion the portfolios are higher risk, suggesting that capital buffers at banks may be weaker than reported ratios suggest.
“The oil and gas sector accounts for 30 per cent of total banking sector credit in Nigeria. Not all news relating to capital at Nigerian banks is negative.
The banks remain profitable, with results boosted by wide margins and currency revaluation gains, large in In a related development, the Naira fell to N405 to the dollar yesterday, weaker than the N397 to the dollar it closed yesterday. This was largely attributed to the supply gap in the market, just as the central bank continues to battle forex speculators.