Palpable fear has gripped the chief executives of many large-tier and mid-tier Deposit Money Banks as an imminent fall in the naira exchange rate throws up a need for additional capital raising.
Checks by our correspondent show that the Capital Adequacy Ratio of a number of the country’s mid-tier and weak large-tier banks is currently at the threshold stipulated by the Central Bank of Nigeria.
This means that in the absence of additional capital raising, a slight depletion in capital will make a number of the banks to fall below the minimum CAR prescribed by the CBN.
Aside from mounting non-performing loans among the country’s lenders, findings by our correspondent showed that a possible fall in the official exchange rate of the naira would make at least five of the banks to fall below the 16 per cent minimum CAR stipulated by the apex bank.
“The situation is a bit terrible now. Aside from the NPLs that are rising among a number of banks, any fall in the naira-dollar official rate will put many banks in trouble as far as the CBN’s CAR is concerned. This is because many of us are already at the threshold. A slight fall in the value of the naira means not less than five banks will sink below the CBN’s CAR,” an executive director in one of the leading banks told our correspondent on Sunday on the condition of anonymity, because he was not officially authorised to speak on the matter.
This came amid predictions by notable economic and financial experts that the naira would hit between 350 and 400/dollar at the official window this year instead of the current rate of 305.
The Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, in the firm’s economic outlook for 2017 released recently, predicted that the naira would trade at 350 to the dollar at the official market and depreciate to 520 to the greenback at the parallel market.
Afrinvest West Africa Limited, a Nigeria-based investment bank and research advisory firm, in its 2017 economic outlook released last Tuesday, also said the official exchange rate of the naira might tumble by about 31 per cent to 400 per dollar before the end of this year.
“If you think about the monetary policy environment, we think that the CBN will be forced by the market to make a change. Currently, the naira is pegged at 305/dollar; we see it moving towards 400/dollar by the end of the year,” the firm said.
Banking sources said several banks were already looking at how to raise additional capital ahead of the possible fall in the value of the naira at the official market.
It was also learnt that because of the tough state of the economy, which has made it difficult to raise additional capital locally, many of the lenders were looking at getting foreign partners to make equity injection or buy stakes in the banks.
Already, some foreign banks operating in Africa are planning to acquire and recapitalise some weak banks in Nigeria.
The Chairman, FirstRand Limited, Laurie Dippenaar, whose firm is seeking to acquire a mid-sized lender in Nigeria, said the firm was also considering one other target after ending talks with two banks due to disagreement over price.
The weak banks are currently valued below their true worth in the country’s capital market following the prevailing negative sentiment of investors, which has diminished their capital status, thus putting them in dire need of additional capital.
The current devaluation of the naira is aggravating the problem and diluting the financial power of Nigerian banks
The Group Managing Director, Afrinvest, Mr. Ike Chioke, whose firm had predicted that the naira-dollar exchange rate at the official market would fall from 305 to 400 this year, said the exchange rate would drive the banking sector.
Chioke said, “The factor that will drive the banking sector this year is exchange rate. We are officially at 305, while the parallel market is 498. Quite a number of banks have dollar-denominated risk weighted assets on their balance sheets. The more we move towards a free floating of the naira or devaluing the naira, the more that drags down their capital adequacy ratio.
“And if the threshold is 15 per cent or 16 per cent (as the case may be), and at N305/dollar, you are just at 16.5 or 17 per cent; if I move the official rate to say 350, you may see the same bank because 30 per cent of its risk assets are in dollars, you find that its CAR has dropped to 14 per cent. At that point, it needs to then raise more capital.”
He also said, “I think quite a number of the mid-tier banks and some of the weaker large-tier banks are in that space where a slight movement in the exchange rate may force them to fall below the regulator minimum of CAR. In which case, they will need to raise capital, do rights issue and get new equity injection.
“And we are already seeing that; as they close their 2016 accounts soon, watch out for announcements on annual general meetings; you can see that they will be taking measures that will give them all kinds of flexibility to attract new capital. That is likely to happen.
“While we are talking about the need to reform the currency market, for the banks, it has this little biting on the backside because those reforms are what will create that requirement for additional capital injection.”
The Chief Executive Officer, Cowry Asset Management Limited, Mr. Johnson Chukwu, said the structure of the risk assets in commercial banks differs in terms of currency and sector of exposure.
This, he said, would determine the extent the possible fall in the naira value would affect them.
Chukwu stated that banks with higher dollar-denominated risk assets and higher NPLs would suffer the most.