30 November 2014, Abuja — Fitch Ratings says that the Central Bank of Nigeria (CBN’s) move to devalue the naira and raise interest rates will have only a limited impact on Nigerian banks at present, but forex risks are high for the sector.
The global rating agency notes: “Nigerian banks’ Viability Ratings which reflect their intrinsic credit strength, are low (in the ‘b’ range) and incorporate the challenging and volatile operating environment in Nigeria, so the policy move is unlikely to change the ratings, says Fitch in a statement issued in London on Thursday.
According to Fitch, “Around 40 per cent of Nigerian banks’ lending is in foreign currency, but they have small net long balance sheet positions to foreign exchange, so the impact of the weaker naira on banks’ credit risks, liquidity and solvency is likely to be manageable.”
The CBN devalued the mid-point of the naira’s official trading band from N155/$ to N168/$ and widened the band significantly.
The CBN also raised the benchmark interest rate to 13 percent from 12 percent, the first change since October 2011, and increased the cash reserve requirement (CRR) on private sector deposits to 20 percent (from 15%).
Fitch pointed out that “The interest rate hike would not necessarily lead to higher impaired loans, but higher funding costs will compress margins. For some banks, higher rates will lead to mark-to-market losses on government securities held in available-for-sale portfolios, although the impact on capital is likely be moderate. We also expect cost of funding to rise because of further tightening in inter-bank liquidity owing to the higher CRR. The CRR on public sector deposits remains unchanged at 75 percent.”
The rating agency maintained that the recent surge in banks’ US dollar debt funding and lending leaves banks more vulnerable to forex risks, especially if there is further devaluation. Nigerian banks have raised funding internationally over the last year helped by stronger investor appetite for Nigerian debt.
*Sola Alabadan – Daily Independent