CBN Governor, Mr. Godwin Emefiele
Actions aimed at protecting the economy and the banking system by the Central Bank of Nigeria will make the profits of Deposit Money Banks in the country for next year to drop, global rating agency, Fitch Ratings, said in a report released on Wednesday.
While recalling that some of the regulatory headwinds had led to weaker profitability and "stemmed credit growth" in the first half of 2014, the rating agency said Nigerian banks' assets growth and earnings would experience further fall over the next 18 months.
Fitch, however, observed that the nation's banks were performing well despite the twin hurdles of tight monetary policy actions and new banking rules.
The Director, European Middle East and Africa Financial Institutions' team, Fitch, Mr. Mahin Dissanayake, said, "This is mostly supported by continuing robust economic growth. Nevertheless, we expect bank performance and growth to moderate over the next 18 months due to the Central Bank of Nigeria's actions aimed at protecting the economy and the banking system.
"The CBN's stance also shifted towards protecting the consumer through its revised rules on banking charges introduced in 2013. All these moves, however, led to weaker profitability and stemmed credit growth in H114 – a trend that is likely to continue into 2015."
The CBN had increased the Cash Reserve Requirements on public sector deposits to 75 per cent from 12 per cent since July last year in order to curb inflation.
It also reduced how much banks could charge accountholders whenever they withdrew money as part of its plans to phase out Commission on Turnover charges.
Also, the Asset Management Corporation of Nigeria had last year raised its annual levy on banks to 0.5 per cent from 0.3 per cent of the banks' assets.
All Fitch-rated Nigerian banks were profitable in 2013 and 2014 but their performance slipped.
According to the rating agency, the AMCON levy and network expansion strategies have made the banks to experience earnings pressure and high operating costs.
The report added that "banks are now seeing some asset quality deterioration with rising absolute non-performing loans, reflecting fast loan growth since 2011.
It added, "Most banks' NPL ratios remain below the five per cent prescribed by the CBN but Fitch views this as unsustainable in the long-run. Very high loan concentrations by borrower and sector expose banks, particularly the smaller banks, to significant event risk.
"Banks are also seeing moderate liquidity pressure with rising loans/deposit ratios. In response, the banks' large customer deposit bases are continuing to expand on strong GDP growth and increasing banking penetration.
"The focus is on raising low-cost retail deposits to strengthen funding profiles, particularly following the cash reserve requirement hikes on public sector deposits. Several banks have successfully tapped the Eurobond market to raise longer-term US dollar funding to meet the strong demand for US dollar loans from major corporates, although it exposes the banks to foreign exchange-related risks."
The global rating agency expects the banks' capitalisation to come under pressure due to the Basel II implementation in 2014 and the proposed new regulatory capital computation rules.
As a result, Fitch said it believed regulatory total capital adequacy ratios could fall between 200 basis points and 300 basis points this year.
Most Fitch-rated banks report Fitch core capital and Basel I regulatory capital ratios in excess of 20 per cent, which is considered a comfortable level given the risks inherent in Nigeria. A sharp decline in capitalisation could be negative for bank ratings.
The report stated, "Sovereign support drives most Nigerian banks' Issuer Default Ratings. Of the nine Nigerian banks rated by Fitch on the international scale, six have long-term IDRs driven by potential state support."
Source: PunchNg
