Moody’s: Rising Foreign-currency Deposits will Ease Pressure on Banks

Goddy Egene

One of the global rating agencies, Moody’s Investors Service has stated that commercial banks’ rising foreign-currency deposits will support the financial institutions’ foreign-currency funding and ease liquidity pressure in the banking system.

In addition, it would help reduce the ratio of foreign-currency loans to foreign-currency deposits, the rating agency added.
Moody’s which stated this in a report yesterday, pointed out that Nigerian banks’ credit profiles remain vulnerable to adverse changes in global and domestic liquidity conditions, including global oil price and foreign exchange (FX) fluctuations as well as the Central Bank of Nigeria’s (CBN) monetary policy.

The National Bureau of Statistics (NBS) recently released data showing that foreign currency deposits had increased to $15.3 billion in December, up by 26.6 per cent, from December 2017.
“Rising foreign-currency deposits are credit positive for Nigerian banks because they will boost foreign-currency liquidity and funding amid forthcoming bond repayments and possible external shocks. “Foreign-currency deposits increased nearly 27 per cent in the past year after reaching a low of $11.1 billion in September 2017,” the report added.

Deposits had contracted from 2015 on account of lower oil revenue, foreign-currency rationalisation by the CBN and Nigeria’s economic recession.
Furthermore, the rating agency noted that the increase in foreign-currency deposits mitigates the negative pressure of tighter dollar liquidity that some Nigerian banks face ahead of their maturing bonds in 2019.

“Nigerian banks have relatively modest foreign-currency liquidity, as indicated by their liquid foreign currency assets to foreign total assets,” it stated.
The average foreign-currency liquidity for the system was 25 per cent at December 2017, compared to an overall liquidity ratio of 38 per cent.
Foreign-currency liquidity risk is more acute for banks with Eurobonds due in the near future.

Nigerian banks currently have $2.8 billion of Eurobonds outstanding and about $1.1 billion of these mature this year.
“Some banks’ front-loaded debt maturity profiles will strain their foreign-currency liquidity. Zenith Bank Plc for example, has a $500 million bond (about 50 per cent of its outstanding Eurobonds) maturing in April 2019 and Access Bank Plc has a $400 million bond with a June 2019 call date, and the general practice is to redeem the bonds at call date (about 57 per cent of its outstanding Eurobonds).

“Additionally, Access will take on the liabilities of Diamond Bank Plc as part of its announced merger, including a $200 million Eurobond maturing in May 2019. “The short-term liquidity pressure is mitigated by the relatively high liquid foreign-currency assets to total assets of these banks, with Zenith’s ratio at 35 per cent at year-end 2018 and Access Bank at 37 per cent as of June 2018,” it stated.

Continuing, the report added: “Fidelity Bank Plc and United Bank for Africa Plc do not have maturing bonds until 2022.
“Although Nigerian banks’ local-currency balance sheets are fully funded by deposits, the banks rely on foreign-currency market funding (e.g., Eurobonds and bilateral loans with foreign banks) to support their foreign-currency-denominated loans, which contributed about 50 per cent of total loans as of June 2018.

“The average ratio of dollar loans to dollar deposits was high at about 193 per cent at year-end 2017. Additionally, growing foreign-currency deposits will soften competition for these deposits and reduce banks’ reliance on more expensive market-based funding,” it added.
However, foreign-currency deposits are exempted from Nigeria’s high cash reserve requirement of 22.5 per cent. Despite the positive effect of foreign-currency deposit growth, it only partially eases the risks associated with Nigerian banks’ foreign currency activities.