Report: Banks May Face Challenge Servicing Dollar Obligations

Obinna Chima

Following recent depreciation of the naira exchange rate that came with the new forex policy, Nigerian banks are likely going to face challenges servicing their US dollar obligations, a report has stated.

Lagos-based investment and research firm, CSL Stockbrokers Limited, which stated this in a report titled: “Banks and FX Devaluation,” held the view that given very limited international dollar credit to Nigeria, banks may either resort to supranational lenders and development banks, or else buy US dollars at costly rates to meet their obligations.

“Borrowings in US dollars are problematic under a devaluation scenario. Banks need to have performing US dollar assets in order to receive dollars with which to service their own US dollar borrowings. The worse these US dollar assets perform in cash terms (for example, re-scheduled US dollar loans to the oil & gas sector, with grace periods during which banks do not receive cash) the more banks have to find other sources of US dollars with which to service their own borrowings.

“An extreme case of this would be a bank simply purchasing US dollars with Naira at unfavourable rates in order to service a US dollar obligation. Note that it has become quite difficult for most banks to refinance US dollar loans with international banks, though we assume that most have access to the supranational lenders, and to development banks, for re-financing,” it added.
It also anticipated that cost of risk (CoR) would “rise as a result of devaluation, though much of the economy has been working with the parallel naira/dollar rate for over a year.”

The report explained: “Devaluation, in theory, challenges capital adequacy ratios (CAR) because the naira-equivalent value of risk-weighted assets (RWA) rises as these include foreign currency loans. “However, the weight of foreign currency loans in RWAs is for the most part moderate (34%-44%), and banks will likely make windfall gains from net long FX positions which in turn boost capital.

We see moderate erosion of CAR overall, and note that the CBN has postponed hiking the minimum total CAR from 15 per cent to 16 per cent.”
The report assessed the likely impact of notional 50 per cent naira devaluation on the top-five listed Nigerian banks.

The banks are FBN Holdings, Zenith Bank Plc, Guaranty Trust Bank Plc, United Bank for Africa Plc (UBA) and Access Bank Plc.
It expressed optimism that banks will retain comfortable capital levels, adding that although devaluation “would probably bring some liquidity challenges, but since the biggest challenges are faced by the strongest banks (notably Zenith Bank), we believe these can be overcome.”