Despite Liquidity Crunch, Banks Maintain Ratio at Above 30%

Kayode Tokede

Amid tighten monetary policy by the Central Bank of Nigeria (CBN), Deposit Money Banks (DMBs) operating in Nigeria reported mixed Liquidity Ratio (LR) above the regulatory requirement in the 2022 financial year.

Also, Capital Adequacy Ratio (CAR) in the banking sector remained stronger to reflect DMBs soundness and resilient despite macro economic challenges.

Liquidity ratio is used to measure a company’s capacity to pay off its short-term financial obligations with its current assets, while CAR is used to measure how much capital a bank has available, which is reported as a percentage of a bank’s risk-weighted credit exposures.

Liquidity ratio in the banking sector was well above its prudential limit at 44.1 per cent, while the CAR remained at 13.8 per cent in 2022, staying within its prudential range of 10 -15per cent, according to the CBN.

Under the current guidelines, the CBN requires that banks maintain minimum liquidity ratio as follows: Deposit Money Banks (DMBs): 30 per cent; merchant banks: 20 per cent; and non-interest banks: 10 per cent.

The 2022 liquidity ratio and CAR outcome are on the heels of global economy that is on a tight rope – ongoing global banking crisis (Silicon Valley Bank, Signature Bank, Credit Suisse with a possible trickledown effect on emerging economies including Nigeria; ongoing impact of Ukraine/Russian war; knock on effect of supply chain constraints from China lockdowns.

In 2022, the CBN raised the Cash Reserve Ratio (CRR) to 32.5 per cent from 27.5 per cent. The CRR is the share of a bank’s total customer deposit that must be kept with the central bank in the form of liquid cash.

Double-dight inflation due to higher food and energy prices; tension towards the 2023 general elections; FX scarcity that eventually led to crash in forego exchange, were among domestic headwinds Nigeria’s economy faced in 2022.  

THISDAY analysis of banks’ 2022 financial results showed that Stanbic IBTC Holdings, followed by Zenith Bank Plc and United Bank for Africa Plc had the highest liquidity ratio in the banking sector, while UBA and Guaranty Trust Holding Company (GTCO) Plc led in CAR.

Specifically, Stanbic IBTC Holdings in 2022 reported 85.04per cent, a decline from 105.40 per cent reported in 2021 financial year, which is still above 30 per cent requitement of CBN.

As Zenith Bank (Group) closed 2022 with 75 per cent liquidity ratio from 71.5 per cent in 2021, while its banking subsidiary closed 2022 with 67 per cent liquidity ratio as against 61.9 per cent reported in 2021.

In addition, Zenith bank reported a drop in its CAR to 19.8 per cent in 2022 from 21 per cent reported in 2021.

Zenith bank in a presentation hinted that the reported capital adequacy ratio and liquidity ratios –well above regulatory requirements of 30 per cent for Liquidity and 15per cent for CAR.

“Capital base –predominantly made up of Tier-1 (core capital) which consists of share capital and reserves,” the bank added. 

Furthermore, the likes of UBA reported significant increase in its liquidity ratio to 68.3per cent in 2022 from 47.60per cent in 2021, as GTCO declared 49.93 per cent liquidity ration in 2022 from 38.26 per cent in 2021, well above the regulatory minimum requirement of 30per cent.

According to GTCO, the Group maintained strong capital positions with a Full IFRS 9 impact CAR of 24.1per cent, 910basis points above the regulatory minimum of 15per cent.

The bank explained that, “Tier 1 capital remained a significant component of the Group’s CAR at 23.8 per cent representing 98.8 per cent of the Group’s CAR of 24.1per cent.

“The robust capital position provides the Group with the needed headroom for future expansion and risk-taking.

“The Group’s capital has been sensitized for Basel III compliance and three levels of devaluation of Naira to USD N550-N600-N650/$1 and found robust enough to meet the requirements of additional capital buffers – conservation and counter-cyclical under Basel III and expected growth in the Risk weighted value of the FCY component of the Group’s Balance sheet.”

Other Tier-1 DMBs with liquidity ratio above CBN’s requirement include Access Holdings at 39.5 per cent from 50.7 per cent in 2022, while liquidity ratio for Firstbank, the banking subsidiary of FBN Holdings dropped to 31.7 per cent in 2022 from 33 per cent in 2021.

Also, CAR for Firstbank dropped from 17.4 per cent in 2021 to 16.8 per cent in 2022.

Access Holdings attributed the decline liquidity ratio to a significant increase in restricted deposits y/y with the CBN, stressing that its well capitalized with regulatory capital above the   minimum requirement of 15 per cent.

According to Access Holdings, the official Cash Reserve Ratio has steadily grown over the past five years, rising to 32.5 per cent in Q4 2022 (2018: 22.5 per cent). This represents N675billion y/y increment in restricted deposits in .2022.

Access Holdings, thus, closed 2022 with 20.2 per cent CAR from 24.5 per cent reported in 2021.

Meanwhile, Fidelity bank closed 2022 with 39.60 per cent liquidity ratio from 40.40 per cent, while its CAR dropped to 18.1 per cent in 2022 from 19.10 per cent in 2021.

“Proceeds from the successful private placement will add circa 100 basis points to CAR in 2023 which will increase existing headroom for asset growth,” the management of Fidelity Bank explained.

Stakeholders have expressed that intensive regulation of Nigerian banks has helped them to remain sound.

Speaking with THISDAY, the Vice President, Highcap Securities, Mr. David Adnori stressed that the statutory required liquidity ratio for banks is 30 per cent.

He explained further that, “If a bank has investment opportunities in the economy, a major portion of that fund that constitutes liquidity ratio is expected to be invested in such investments that will yield income for the bank and boost shareholders returns on investment and expand in branches network.

“The bank can invest in government bond, treasury and extend credit to customers. There are other areas of investment.”

The Deputy Governor, Financial System Stability, CBN, Aisha Ahmad in her personal statement during the first Monetary Policy Committee (MPC) in 2023 stated that results of stress tests showed resilience of banks’ solvency and liquidity ratios in response to potential severe macroeconomic shocks.

She urged that the Bank must remain vigilant to proactively manage probable macro risks to the financial system arising from spillover effects of global headwinds and domestic vulnerabilities, in view of the financial system’s strategic role in driving sustainable economic recovery.