Money market value drops by N0.9trn in January

…As Repos, two others account for 16.9% market turnover

The money market value has depreciated by a total sum of N0.88trillion in just one month, as Repurchase Agreements (Repos), Buy-Backs and Unsecured Placements accounted for 16.90 per cent of market turnover 24.31 per cent in December in 2017.

The Daily Times checks revealed that the three segments combined contributed 93.64 per cent to the total turnover in the Fixed Income and Currencies (FIC) markets.

In fact, activities in the secured Money Market (i.e. Repos/Buy-Backs) settled at N1.86trn in January 2018 32.23 per cent, N0.88 trn less than the value recorded in December 2017 (N2.74trn).

However, Year on Year (YoY), turnover on Repos/Buy-Backs recorded a 4.06 per cent (₦0.07trn) increase from the value recorded in January, 2017 (N1.79trn)

Unsecured Placements/Takings closed the month at a turnover of N120.61bn, a 14.69 per cent decrease (N20.76bn) from the figure recorded in December 2017 (N141.37bn) and a 49.65 per cent decrease (N118.93bn) on YoY basis (N239.54bn as at Jan. 2017)

Average O/N8 NIBOR9 for the period under review stood at 11.24 per cent (8.56% in Dec. 2017), indicating a fall in inter-bank liquidity

However, the number of executed trades captured on the E-Bond Trading System in Jan. 2018 amounted to 17,041 as against 16,307 recorded in Dec. 2017.

Even though, the executed T.bills trades increased by 4.97 per cent (725) , while FGN bonds increased by 1.79 per cent.

Meanwhile, Deposit Money Banks (DMBs) operating in the country are determined to move to a more market-based presentation of foreign-currency (FC) assets, liabilities and profit-and-loss items is likely to come into focus when they publish their 2017 results in the coming weeks, Fitch Ratings says.

Financial statements with FC items translated more in line with market exchange rates will give a more realistic representation of banks’ FC positions and capital at risk from potential further depreciation of the naira.

Exchange-rate risk warrants scrutiny for Nigerian banks because about 40% of assets and liabilities in Nigeria’s banking sector are denominated in US dollars and not all banks operate with matched FC positions.

The new Fitch report stated that most of the bank that was rated by the rating agency will publish their 2017 financial statements based on the Nigerian Foreign Exchange Fixing (NiFEX) rate (about NGN330/USD) instead of the official exchange rate of NGN305/USD, which they previously used.

It further pointed out that some may use a blended rate. The NiFEX rate is the Central Bank of Nigeria’s reference rate for spot foreign-exchange transactions, widely used on the interbank market.

According to Fitch, “Adopting the NiFEX rate is, however, only a partial step towards using market exchange rates. IFRS guidelines say that companies operating in countries with multiple exchange rates should translate their FC assets and liabilities into local currency based on the exchange rates at which they expect to settle them.

“But the guidelines leave scope for considerable judgment and flexibility, and Nigeria operates with multiple exchange rates, which adds to the confusion.”

The rating agency, noted that exchange rate used under the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism is the closest to a true market rate.

“Switching to NiFEX or a blended rate would give a more meaningful representation of banks’ FC positions than using the official rate, in our view. But banks would still be translating FC into naira at a rate significantly below the NAFEX rate.

“We do not expect banks will go further at this stage as every increase in the exchange rate used could lead to a drop in reported regulatory capital ratios, due to inflation of FC risk-weighted assets, even though the impact would be partially offset by FC translation gains.

“We recently examined Nigerian banks’ FC positions as part of a peer group review. We calculated banks’ capacity, based on end-September 2017 data, to withstand a hypothetical severe naira depreciation to NGN450/USD without breaching their minimum regulatory total capital adequacy ratios (CARs).

The Central Bank of Nigeria sets different minimum CARs for Nigerian banks: 16 per cent for those it considers to be systemically important, 15 per cent for those with international banking licences and 10 per cent for the rest.”

We found that that the largest banks – Access, FBN Holdings, Guaranty Trust Bank, United Bank for Africa and Zenith – would be able to withstand this scenario without breaching their minimum CAR requirements.

However, second-tier banks had mixed results. Capitalisation is an important ratings differentiator for Nigerian banks, albeit within a narrow rating range. All the ratings are in the highly speculative ‘B’ range, constrained in most cases by Nigeria’s sovereign rating of ‘B+’/Negative and our assessment of the operating environment.