• Says Capital Adequacy Remains Weak

International rating agency- Fitch says the party may be over sooner than expected for Nigerian banks, which have been relying heavily on investments in very high Treasury Bill yields to boost interest income and maintain margins since the second half of 2016.
A statement by Janine Dow, Senior Director, Financial Institutions – Banks, at Fitch, on Friday, warned that T-Bill yields have fallen in recent weeks to about 15.5%, just as it may drop lower from mid-year levels of over 18.5%.
According to Fitch, the high T-Bills yields are part of attempts by the Central Bank of Nigeria (CBN) to control inflation and manage demand for foreign currency, and that by “providing a remunerative, relatively low-risk, naira-denominated investment (interest payments are tax-free), they hope to encourage Naira retention and dampen demand for US dollars.”
CBN data, Dow noted, show that the volume of Naira time and savings deposits held by the banking sector fell 8.7% to N11.7tr (USD38bn at the official exchange rate in the 12-month to July 2017, as depositors switched to T-Bill investments. T-Bill yields are still considerably higher than savings deposit rates, which are capped at 30% of the monetary policy rate, currently 14%.
Large, systemically important banks are holding on to their deposits, but many second-tier and smaller banks are seeing deposit outflows and almost all banks are reporting an increase in deposit funding costs.
Investdata checks show that at least three of Nigeria’s biggest banks have reported drops in customer deposits for the second consecutive quarter this year, a situation that continues to send shockwaves their management.
The CBN recently raised the minimum T-Bill purchase amount to N50 million (USD164,000) from N5,000, a situation expected to lock out small retail depositors, but may significantly impact overall deposit flows because most Nigerian banks are majority-funded by corporate deposits.
“For now, high yields on banks’ investments in T-Bills are offsetting the rise in their funding costs and compensating for the scarcity of opportunities for profitable new lending to the private sector. Lending opportunities have been constrained by weak economic growth, continued soft oil prices and sluggish consumer demand.
“High cash reserve requirements (CRRs) on naira deposits, currently set at 22.5%, are also a constraint on lending. Naira CRRs are not remunerated. In practice, some Nigerian banks are operating with an effective CRR of about 30% because the CBN is not remitting rebates due to banks when deposits are withdrawn. Our conversations with banks suggest that the CBN is targeting the sector’s more liquid banks with this restriction,” Dow added.
This is made worse by the already stringent prudential liquidity requirements that require banks to hold liquid assets equivalent to 30% of short-term Naira liabilities, added to the fact that “the portion of excess CRR retained by the CBN and owed to the banks cannot automatically be included in liquidity ratio calculations.
“Earnings retention is important if banks are to continue to strengthen their capacity to absorb losses at a time of persistent fragility in the Nigerian operating environment. Banks tell us that impairments appear to have peaked, but we view this as far from certain, and the impairment metrics do not yet fully reflect the requirements to provide for expected credit losses under the incoming IFRS 9 international accounting standard.”
Moreso, Fitch says it considers the capital adequacy of Nigerian banks weak in general, given that oil-related loans, representing about 30% of total, has undergone extensive restructuring and borrowers’ ability to service them in line with the new terms is yet to be tested.
“Fitch-rated banks reported an average IFRS-calculated ratio of impaired loans to total loans of close to 8% in June 2017, but reporting classifications differ among the banks and regulatory forbearance is not uncommon in Nigeria.”