Ibrahim Apekhade Yusuf examines the fate of the banks following the stress test administered on some banks by the Central Bank of Nigeria.
Is the nation’s banking landscape in any danger of some sorts? This question rang through recently following the outcome of the stress test conducted by the apex bank on a few of the deposit money banks in the country, which revealed that some banks were ailing indeed.
Crux of the matter
According to the result of Central Bank of Nigeria (CBN) stress test released last Thursday, the funding positions of seven commercial banks are inadequate; fueling fears that al may not be well with the banking sub-sector.
The financial stability report signed by CBN Director, Financial Policy and Regulation Department, Kelvin Amugo, showed that in the less than 30-day period analysis, seven banks were not adequately funded, while in the 31 to 90-day period, nine banks had funding gaps.
The CBN had mandated commercial banks to conduct stress tests to ascertain their risk mitigation and control systems and where necessary the adequacy of their internal capital and provisions for expected credit losses, to enhance the assessment of their vulnerability to different risk types and external shocks.
The report, however, said the cumulative position for the industry showed an excess of N4.8 trillion assets over liabilities.
The seven banks were, however, not named by the apex bank. Nigeria has 24 banks.
The report, which covered the period ended December 2018, showed that six banks accounted for 82 per cent (N252.00 billion) of total placements and 86 per cent (N 266 billion) of total takings, of which 71 per cent (N190 billion) was provided by the top four placers of funds.
The stress test result revealed that, after a one-day run scenario, the liquidity ratio for the industry declined to 34.69 per cent from the 51.87 per cent pre-shock position and to 17.55 and 13.48 per cent after a five-day and cumulative 30-day scenarios.
The result also revealed that, under five-day and cumulative 30-day run scenarios on the banking industry, liquidity shortfalls declined to N1.58 trillion and N1.98 trillion.
The results of the stress test of default in exposure to the oil and gas sector showed that the banking industry could withstand up to 50.00 per cent default as the post-shock Capital Adequacy Ratio (CAR) remained at 10.24 per cent.
The results of the stress tests on the net position of interest sensitive instruments showed that the banking industry would maintain a stable solvency position to interest rate shock of up to 1000 basis points downward shift in yield curve as the post-shock CAR declined marginally from 15.26 to 13.41 per cent.
The industry pre-shock assets and liabilities maturity profile at end-December 2018 revealed that the shorter end of the market less than 90 day buckets were adequately funded.
Contagion risk from the unsecured transactions in the interbank market was moderate at end- December 2018. The results of simulated conditional counter-party default from unsecured interbank loans indicated low risk as the banks, except two, maintained post-shock CAR above 10 per cent.
The Implied Cash Flow Analysis (ICFA) assessed the ability of the banking system to withstand unanticipated substantial withdrawals of deposits, short-term wholesale and long-term funding over five days and cumulative 30 days, with specific assumptions on fire sale of assets.
The test assumed gradual average outflows of 3.8, 5.0 and 1.5 per cent of total deposits, short-term funding and long-term funding respectively, over a 5-day period and a cumulative average outflow of 22.0, 11.0 and 1.5 per cent of total deposits, short-term funding and long-term funding respectively, on a 30-day balance. It also assumed that the assets in Table 3.10 would remain unencumbered after a fire sale.
Amugo said the banking industry’s outlook is positive, given the expected enhanced capital base for most banks arising from the capitalisation of year 2018 profits in the first half of 2019.
However, banks’ exposure to the oil and gas sector as well as the implementation of International Financial Reporting Standard 9 (IFRS 9) remains a threat to overall profitability.
“The CBN will continue to collaborate with the fiscal authority and other financial services regulators to address the observed challenges towards ensuring that the gains made are sustained to reinforce financial system stability,” he said.
During the review period, seven banks were categorised as Domestic Systemically Important Banks (D-SIBs). The banks were selected based on the D-SIB supervisory framework, given their size, interconnectedness, substitutability and complexity. The D-SIBs accounted for 63.80 per cent of the industry total assets of N35.10 trillion and 65.23 per cent of the industry total deposit of N21.73 trillion as well as 66.00 per cent of the industry total loans of N15.34 trillion.
No cause for alarm
As to be expected, the Governor of Central Bank of Nigeria, Mr Godwin Emefiele had last Sunday debunked claims that nation’s banking sector is in crisis of some sorts, the failed stress test notwithstanding.
Emefiele spoke during a media briefing on the sidelines at the just concluded annual meetings of the World Bank/International Monetary Fund holding in Washington DC.
He said the Nigerian banking sector remain strong and would continue to meet its obligation to the economy.
The CBN governor said the fact that some banks its stress test was not enough to make the banks to become weak to the extent of not meeting its obligation.
He said the strategic health of Nigerian banks remain strong, noting that the apex bank would continue to engage the banks to ensure that they do not fall short of the major parameters set by the CBN.
“Stress testing has become part of our normal routine in trying to check the health of all the banks in the industry.
“So what you will find is that from time to time, if one bank fails one ratio, we advise the bank to improve on that ratio or if its capital adequacy or liquidity or prudential ratios that we prescribe to the banking industry.
“So the fact that you read that seven banks failed stress test does not mean that those banks are weak but what we are saying is that if Bank A fails liquidity, then we tried to address it with that bank.
“So it has nothing to do with the weakness of any bank that would lead to panic or systemic crisis in the banking industry.”
Also speaking, the CBN, Isaac Okorafor, told reporters that there was no cause for alarm over seven banks failing the stress test.
“Movements in prudential benchmarks are normal in a bank, depending on the timing of the checks and the tests. If a bank fails a test, it does not mean that such a bank is in distress. A bank that fails any test this quarter may pass it in the next quarter. Normally, the CBN advises any bank that fails any of the tests on ways to correct such and usually things get better during the next period. The story is not a serious thing but people without sufficient knowledge make it look serious,” he said.
It would be recalled that the CBN governor, had on June 2019, while unveiling his second tenure agenda, said the apex bank would work with stakeholders to recapitalise commercial banks in the country, make them stronger to undertake greater tasks.
Emefiele said: “In the next five years, we intend to pursue a programme of recapitalising the banking industry so as to position Nigerian banks among the top 500 in the world. Banks will, therefore, be required to maintain higher level of capital, as well as liquid assets, in order to reduce the impact of an economic crisis on the financial system.
“But relate the value of N25 billion in 2004 when the exchange rate was about N100/dollar to now when the rate is N360/dollar. That is about $75 million. So, we need to recapitalise.”
Clear and present dangers
Expected, the outcome of the stress test on some of the banks is already sending jitters out there, with many depositors expressing worry over the possible fate that may befall the affected banks.
Investigation by The Nation revealed that there are planned talks with parties who are considering merger and acquisition in the wake of the stress test.
“Mergers and acquisitions will naturally come up soon because the Central Bank of Nigeria (CBN) is working out modalities for the banks to recapitalise. Mergers and acquisitions are inevitable because the apex bank is determined to produce fewer but more resilient banks that can undertake more audacious projects and become more globally competitive,” according to said a source, who asked not to be named.
Since the news broke, anxious depositors have begun using unprofessional parameters to determine the seven out of the 22 licensed banks that are involved.
Eze Onyekpere, an economic expert and lead director, Centre for Social Justice, said the CBN should have kept quiet rather than revealing the information about seven banks failing the stress test because some banks and their depositors may soon begin to de-market each other out of ignorance.
Meanwhile, the Nigeria Deposit Insurance Corporation (NDIC) has said it was unaware of seven banks failing a stress test as revealed by the apex bank.
Director, communications and public affairs, NDIC, Mr. Sunday Oluyemi, who spoke at the corporation’s 30th anniversary media briefing in Abuja, said the CBN and NDIC were partners in the task of ensuring financial system stability in Nigeria.
“It’s not usual for CBN and NDIC to make such statements because it can hurt the economy. We didn’t issue any warning that banks are on danger list,” he said.
He added that the NDIC would protect depositors by providing an orderly means of resolution and compensation in the event of failure of their insured financial institutions.
The CBN in its financial stability report published on its website revealed that in less than 30-day period analysis, seven Nigerian banks were not adequately funded, while in the 31-90 day bucket, nine banks had funding gaps.
Overall, the cumulative position for the industry showed an excess of N4.8 trillion assets over liabilities.
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