Naira Devaluation Risky for Foreign Currency Loans, Says Report
The devaluation of the naira against global currencies will impact negatively on foreign currency loans and weaken capital base for the lenders, banking sector report has shown.
The Afrinvest Banking Sector Report for 2020, which was released yesterday, said the capital base of the Nigerian banking sector has also come under pressure due to the adoption of International Financial Reporting Standards (IFRS 9). The harsh operating environment resulting in higher non-performing loans and significant write-offs also did not help the lenders.
Also, due to the naira devaluation and weaker asset quality, industry Capital Adequacy Ratio is being pressured in the short term.
The report said the devaluation of the naira would inflate industry foreign currency loans, which is dominated by the oil and gas, manufacturing, general commerce and other import-dependent sectors.
The analysts advised that the industry would now require a recapitalisation exercise in the short to medium term as hinted by the Central Bank of Nigeria.
It, however, said the currency environment and weak investors’ sentiment pose a big challenge to the exercise.
“The underpriced valuation of the banking sector many hurt banks seeking to raise tier-1 capital while tier-2 capital funding cost may be unaffordable to the current risk environment. The CBN directed that the minimum interest rate on savings deposit be reduced to a minimum of 10 per cent of Monetary Policy Rate (1.25 per cent), the previous minimum of 30 per cent of MPR (3.75 per cent) effective from September 1, 2020,” it said.
According to the Afrinvest Banking Sector Report, savings deposits account for about 20 per cent of the total industry deposit while commercial banks are expected to benefit in terms of a moderation in the overall cost of fund.
“In the same vein, with 100 basis points drop in Monetary Policy Rate to 11.5 per cent as well as the adjustment of the asymmetric corridor to +100/-700 basis points, banks with lower liquidity gap would enjoy lower cost from the CBN’s lending window, specifically the standing lending facility. On the growth loan book, it said that n 2020, analysts expect to see a sustained increase in the industry total loans as commercial banks comply with the CBN Loan to Deposit Ratio directive among others,” it said.
The downside risk is the asset quality deterioration which could hamper earnings growth and other key financial metrics such as Return on Equity and Return on Assets in 2020 and beyond.
On moderation in interest income, the report said the introduction of the minimum Loan to Deposit Ratio rate (65 per cent), which carries a penalty for defaulters, has prompted banks to engage in mild pricing wars resulting in lowering of lending rates. Similarly, loan restructuring has dragged interest income lower while the punitive policies by the CBN including the Cash Reserve Requirement -CRR debits- would impact interest income as large pools of cash remains non-earning.
“We also note that the rates in the fixed income market have compressed significantly due to robust liquidity positions, thus driving yields on investment securities lower. In our view, we believe that non-interest income could be the major game changer for toppling growth in 2020 as interest income comes under pressure,” he said.