Fitch: Nigerian Banks' Risk Weight Rises

Global rating agency, Fitch Ratings has said that the recent upward review of the risk weights of commercial banks in Nigeria will likely add to pressure on the banks’ capital ratio.

However, Fitch, which said this in a statement obtained from Reuters yesterday, added that if successful in reducing sector concentration, the move by the Central Bank of Nigeria (CBN) may enhance asset quality and risk management.

As part of efforts to entrench risk management in banks, the apex bank had about a fortnight ago, reviewed the risk weights assigned to some identified exposures in the industry. It had said that the risk weight assigned to direct lending to local governments, states, ministries, departments and agencies (MDAs) had been increased from 100 per cent to 200 per cent.

Amongst others, the banking sector regulator also stated that total exposure to a particular industry would include off-balance sheet engagements in which the bank takes the credit risk, just as it restricted the flow of cash among related parties within a Holding Company (HoldCo) structure.

But Fitch said: “Capital has been tightening at some banks as they expand their loan books following the Asset Management Corporation of Nigeria’s (AMCON’s) clean-up of the sector. Fitch Core Capital (FCC) ratios at end-September 2012 were 10 per cent-30 per cent.

“Some Nigerian banks have lower FCC than is appropriate for their growth in a difficult operating environment (Nigeria is rated 'BB-'/Stable). This is reflected in their low Viability Ratings (mostly in the 'b' range). The generous dividend policies demanded by Nigerian investors mean internal capital generation is unlikely to support sustainable growth in the medium term.”

It also declared that excessive credit expansion had been temporarily subdued in the sector by higher interest rates on government securities following the expiry of the interbank guarantee from the CBN in 2011.

“But we still expect loans to grow 18 -20 per cent this year, close to the rate of inflation-adjusted economic growth as banks focus on increasing lending to government-sponsored projects, especially in the power sector. We see little appetite for fresh equity issuances in the market. Some banks may want to fund growth with long-term subordinated debt.

“This does not count as loss-absorbing capital in our analysis, so further growth together with higher risk weightings would put core capitalisation under pressure. The Nigerian banks continue to report capital ratios based on local Generally Accepted Accounting Principles (GAAP) equity rather than the International Financial Reporting Standards (IFRS) adopted for financial reporting in 2012. This is the same approach as taken by some European regulators,” Fitch added.

The agency also estimated that the regulatory capital ratio for Nigerian banks may be between 60 basis points and 120 basis points lower if all banks adopt the IFRS.

“The new rules are designed to direct lending to the real economy and to limit portfolio concentrations that often build up during boom times in Nigerian banks,” it added.

March 07, 2013