13 October 2014, Lagos – Signals emerging from the global economy can best be described as complex considering the trends in macroeconomic and socio-political sphere.
As of now the international financial market has not fully recovered from the 2008 financial crisis. Economies are still weighed down by the aftermath of the crisis.
The global oil market to which Nigeria depends so much on is precariously oscillating and prices are heading south. The story is not different in other sector. The sharing by the three tiers of governments from the federation account is dwindling.
Many socio-political commentators would quickly say that the global economy, fueled by monetary stimuli in Europe and the U.S. appears to have reached a point of inflection based on the moderate rebound of economic activities in Africa, United States of America, Asia and parts of Europe. Yes the financial industry has succeeded in leveraging the modest recovery amidst regulatory adjustments.
A critical analysis of the time series data of the global economy would show that policy adjustments to combat the impact of the 2008 financial crisis have revealed loopholes and weakness in the system, particularly the complexity in design and abnormal levels of illicit transactions by banks, which has come to indicate a high level of governance indiscipline especially in Nigeria.
As a result, regulators have introduced new policies designed to further tighten the noose on banks. The critical question now is how profitable are Nigerian banks.The inability of the recently privatized power sector operators to pay up the over N30 billion owed the Nigeria Gas Company, a subsidiary of the Nigerian National Petroleum Corporation (NNPC), is posing a big challenge to banks loan portfolio.
The debt owed by the generating companies and the over N200 billion borrowed from banks by the new investors to purchase the power assets have slowed down the power sector growth post privatisation.
As a result, these power generating companies are not able to sell enough power to recover cost and service banks loans. Some of the huge loans will soon become non performing assets in the books of banks.
With Asset Management Company of Nigeria foreclosing any further purchase of bad and non performing loans from banks, they (banks) may soon have another round of huge non performing loans. By the Central Bank of Nigeria regulations, banks will have to make provisions for these assets sooner or later.
This will eat up the existing capital structure of most Nigerian banks and this will jeopardize the profit potential of these banks and may subsequently result in systemic distress.
The Central Bank of Nigeria (CBN) last year perhaps in anticipation of this development released a draft document in which it designated eight banks as too big to fail due to the risk their failure could pose to the entire financial system. The central bank also recently changed the way banks calculate capital buffers to align with global standards and increase their ability to withstand losses.
The CBN action is in line with the G-20 proposal that will require top banks in every country to issue special bonds as capital that can assist them in times of crises.
Government leaders are expected to agree in November that the world’s top banks must issue special bonds to increase the amount of capital which can be tapped in a crisis instead of calling on taxpayers to come to the rescue. The bonds, to be known as “Gone Concern Loss Absorption capacity” or GLAC, are seen by regulators as essential to stopping the world’s biggest banks from being “too big to fail.
The plans are being drafted by the Financial Stability Board, the regulatory task force of the Group of 20 economies, and G20 leaders will discuss the reform before it is put out to public consultation in November. The reform would put in place the final major piece of G20 regulation on banking as the global body turns to a “post-crisis” agenda of fostering economic growth and bedding down the rules it has approved.
The CBN ordered Nigerian banks it considered too big to fail to boost minimum capital ratios to 16 per cent last year, compared with 10.5 per cent for South African banks, which control most of the continent’s banking assets. The central bank removed some assets banks can count as capital in preparation for the implementation of Basel II and III, while limiting Tier 2 capital to 33 per cent of Tier 1 capital, according to its August 5th circular.
The banks designated as “too big to fail” or Systematically Important Banks (SIBs) in the CBN draft paper include: First Bank of Nigeria, United Bank for Africa, Zenith Bank, Access Bank, Ecobank Nigeria, Guaranty Trust Bank, Skye Bank and Diamond Bank.
The top eight banks currently account for over 70 percent of the industry’s total assets.
The CBN move seems to be following developments in the developed capital markets, where regulators have sought to name systemically important banks as too big to fail and have proposed higher capital requirements for them. As is the case abroad, a big impact of being named as a SIB by the CBN is that some of banks would require additional capital. The current capital adequacy ratio (CAR) in Nigeria is 10 percent for local banks and 15 percent for banks with international operations.
Of the eight banks named by the CBN, Zenith Bank has the highest liquidity ratio at 63.1 per cent, followed by First Bank at 62.7 percent at. At the other end of the spectrum are Skye at 31.5 percent and Diamond at 36.7 percent. Already some of these banks are out in both local and international capital market to raise new funds. The local capital market is still struggling to be on its proper footing. This leaves the bank no option than to look out side or raise the desired fund through rights issue. As it is, with the current spate of tough regulations and with the wind of dwindling economic fortune across the country, Nigerian banks are in for a tough and rough weather this time around. How they will whither the storm will be a matter of strong management capability. Bank shareholders will once again be on the receiving end of this financial game.