NPL crises threaten CARs of smaller commercial banks-Report
.Confident of banking sector resilient in 2017
A new report from BMI Research, has said that Non-Performing Loans (NPL) exposure in the smaller commercial banks is threatening their Capital Adequacy Ratio (CARs).
The CAR is a measure of a bank’s capital, which is expressed as a percentage of a bank’s risk weighted credit exposures.
It is also described as capital-to-risk weighted assets ratio (CRAR), which is used to protect depositors and promote the stability and efficiency of financial systems around the world.
The report, which is titled: “Nigeria Commercial Banking Report,” explained that even though the economy is improving, it is only the smaller banks, which seemingly have any issues, and that they are confident that the banking sector will remain resilient in 2017, and that a repeat of the 2009 crisis is off the cards.
However, there are two types of capital that are measured as Tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
But BMI analysts, pointed out that a stress test by the Central Bank of Nigeria (CBN) released in earlier in the year found seven Deposit Money Banks (DMBs) having CARs lower than the required threshold of 10 per cent to 15 per cent, depending on size.
This however, prompted some of the banks to publicly claim to be stable, with analysts recommending half-yearly stress to curb anxiety on health status of banks.
But, the apex bank, indeed, put in a series of measures regarding capital ratios following the banking crisis, which makes the sector far more stable than it was previously. However, another shock to the oil sector in the form of further pipeline attacks or structurally lower prices would notably increase these risks.
According to the report, “The Nigerian banking sector is well regulated following a series of new legislation introduced in the wake of the 2009 crisis. As such, we view Nigerian banking as broadly stable over the coming years, despite the challenging headwinds buffeting the sector at present.”
The report added that increasing penetration within the unbanked and the rise of mobile banking offer some tailwinds to growth.
“Despite our expectation for deterioration in asset quality in the coming months, we do not envisage a major crisis in the sector. The banks have, for the most part; manageable (albeit rising) levels of non-performing loans (NPLs) and healthy capital adequacy ratios (CARs). At Zenith, one of the country’s largest banks, the CAR was at 19.0 per cent in October 2016,” the report indicated.
For instance, FirstBank’s CAR, stood at 18.9 per cent, well above the 10.0 per cent mandated by the CBN for banks of that size.
However, the report stated that given that about a quarter of total loans are concentrated in the oil sector, it expects NPLS to continue to rise in 2017.
“Given that about one-quarter of total loans are concentrated in the oil sector, we expect NPLs will continue to rise in 2017, but contend they will remain manageable. All sectors are vulnerable given the general macroeconomic malaise, but oil in particular will be a source of stress. In H217, as the economy improves, and oil prices and production pick up, we expect NPLs will begin to fall once more.”
Stories by Motolani Oseni
