For banks, another opportunity for higher capital adequacy

29 March 2015, Lagos -The extension of deadline on banks’ capital adequacy both for the Systemically Important Banks and for banks that breached the minimum capital adequacy under Basel II is another opportunity created by the Central Bank for banks to ring-fence their respective institutions against shocks, reports Festus Akanbi

NairaThe latest effort of the Central Bank of Nigeria (CBN) to insulate the nation’s banking industry from capital inadequacy became one of the major economic and business issues in the public place last week.

On 13 March, the CBN had issued a letter to the banks on the extension of the deadline for the implementation of higher capital adequacy ratio (CAR) requirements for systemically important banks (SIBs) and the setting of a fresh deadline for banks that breached the minimum CAR under Basel II to submit their recapitalisation plans and execute them.

Period of Grace
Specifically, the CBN gave the affected banks a 15-month period of grace. They have been given three months, till 13 June 2015 to submit recapitalisation plans and till 30 June 2016 to implement them. The CBN’s letter also affirmed the regulator’s willingness to support any under-capitalised bank and added that it may require rapid remedial actions if adequate capitalisation is not restored.
Basel II is an international business standard that requires financial institutions to maintain enough cash reserves to cover risks incurred by operations. The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BSBS).
Capital Adequacy Ratio (CAR) is basically the proportion of the bank’s tier 1& tier 2 equity (Qualifying Capital or Equity) as a proportion of its risk weighted assets (loans). It is the proportion of a bank’s own equity in relation to its risk exposure.
CAR helps regulators protect depositors from banks who lend aggressively and in doing so do not get back most of the money lent. This is because when a bank makes large loan losses that wipe out its total equity, it may lead to an immediate bankruptcy thus making depositors lose their money.
Last year, CBN classified eight Nigerian banks – First Bank of Nigeria Limited (First Bank), Zenith Bank Plc, Guaranty Trust Bank Plc (GTBank), United Bank for Africa Plc (UBA), Access Bank, Ecobank Nigeria Plc, Diamond Bank Plc and Skye Bank Plc – as systemically important financial institutions (SIFIs) and imposed on them a new set of rules, requiring them to maintain a minimum Capital Adequacy Ratio CAR of 16 per cent.
According to a THISDAY report last week, the eight financial institutions designated as SIBs by the central bank were required to hold more liquid assets and a liquidity ratio of 35 per cent. This meant the affected banks were expected to have a minimum liquidity ratio, which is five per cent above the 30 per cent requirement in the industry. The SIBs are First Bank of Nigeria Limited, Guaranty Trust Bank Plc (GTBank), and Zenith Bank Plc, United Bank for Africa Plc (UBA), Access Bank Plc, Skye Bank Plc, Ecobank Nigeria and Diamond Bank Plc.
For the financial analysts who had raised the fear that the deadlines earlier spelt out by the CBN might be a tall order on the affected banks given the emergent challenges they are grappling with, the new arrangement will offer the banks the opportunity to put their houses in order.
A banking specialist with the financial and investment advisory firm, Renaissance Capital, Mr. Adesoji Solanke, noted that tightening capital regulations has been an on-going theme for the Nigerian banks since early 2014, including the introduction of Basel 2 and higher capital requirements for systemically important banks (SIBs). “Partly in light of the short implementation deadlines given to the banks, three banks (Diamond, Access & UBA) all raised tier 1 capital within the last six months. With more banks seemingly in need of tier 1 capital to meet minimum regulatory requirements plus a buffer, the macro environment deteriorating rapidly and significant pools of foreign capital remaining underweight Nigeria presently, we view the CBN’s deadline extensions as a step in the right direction,” he said in a note sent to THISDAY last week.

Capital Decisions
According to him, the new deadline should give the banks some room to make optimal capital decisions around earnings retention and asset growth in the near term, with the consideration of a tier 1 raise in more favourable market conditions.
“That said, we still expect Skye, Stanbic and Ecobank Nigeria to source tier 1 capital near term,” he said. He however expressed worries over First Bank’s capital position put at (15-16 per cent). This position, he said “gives us the most significant concern, not in the least because of its systemic importance. Nevertheless, we expect the bank to focus on earnings retention and slower growth over the next 12-18 months, with the possibility of a tier 1 raise when market valuations improve.”
In a more detailed report, Rencap had earlier last week explained that the CBN’s letter affirms the apex bank’s willingness to support any under-capitalised bank and that it may require rapid remedial actions if adequate capitalisation is not restored.
The report said, “In our view, this extension is a positive development for Nigerian banks as we have previously noted that the pace of implementation of Basel 2 (nine months) and other tighter capital requirements were rather speedy. That said, feedback from our recent international investor road show suggests that given the deteriorating Nigerian macro environment, significant capital-raising events could struggle to attract meaningful international investor participation. We also find international investors increasingly questioning the Nigerian banks’ ability to create value (excess positive returns vs. CoE) given constraining regulations and weakening macro fundamentals. We, however, think that the domestic investor pool or private equity capital could be supportive in some dire instances, drawn by depressed valuations and/or the long-term investment case for the sector.
As banks struggle to stay within the new threshold, Rencap said it expects capital levels and the sufficiency of this to remain an on-going discourse for the Nigerian banks given the probable risks to earnings and book from material asset quality surprises, as well as continued naira depreciation.

In Search of New Buffers
Naturally, the pressure to build more buffers is bound to affect dividend pay-outs and investment analysts said banks need to carry along their shareholders in this respect. “We maintain our view that dividend pay-outs and asset growth are likely to be cut near term to build the necessary capital buffers. That said, we still expect some banks to raise tier 1 capital over the next 12-24 months: Skye (to bolster its CAR and management has guided to a NGN30bn ($150mn) tier 1 raise in 2Q15); Stanbic (to support its future growth plans, attain SIB status and desired minimum CAR of 18 per cent); and Ecobank Nigeria (to meet and exceed minimum CAR requirements).
“On FBNH, we remain concerned about its light CAR of 15-16 per cent, but expect the bank to focus on earnings retention and slower growth over the next 12-18 months, with the possibility of a tier 1 raise when market valuations improve. Access Bank’s rights issue (NGN52.7bn/$265mn) closed recently and feedback from management on its FY14 call was that it should be near-to-fully subscribed. FCMB expects FY14 earnings retention to materially improve its CAR from 9M14 levels. We think other banks in our universe are fairly well capitalised but await FY14 results, where audited Basel 2 CAR will be reported for the first time,” the report by Rencap stated.


– This Day

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