Nigerian Banks’ Resilience to Credit Risk Robust – CBN

Godwin Emefiele


The Central Bank of Nigeria’s Financial Stability report says the banking industry, especially large banks’ resilience to credit risk was in the second half of 2015

THE Central Bank of Nigeria’s Financial Stability Report has shown a marginal decline in the quality of assets in the Nigerian banking industry in the second half of 2015, compared with the position at the end of June 2015. The report released on Wednesday, May 18, covered the second half of 2015.

The report posted on the CBN’s website showed that the ratio of non-performing loans, NPLs, to gross loans increased by 0.21 percentage point to 4.86 percent at end December 2015. The decline in asset quality was attributed to the unfavourable macroeconomic environment in the review period.

The ratio of core liquid assets to total assets decreased by 2.2 percentage points to 16.3 percent at end-December 2015 from 18.5 percent at end-June 2015. Similarly, the ratio of core liquid assets to short-term liabilities decreased by 2.1 percentage points to 25.0 percent at end-December 2015 compared with 27.1 percent at end-June 2015.

In addition, on the basis of size of deposits and assets, available data showed the continued dominance of the five largest banks in the industry during the review period. The market share of the largest bank with respect to deposits and assets stood at 15.65 and 14.27 percents in the second half of 2015, respectively. The average market share of deposits and assets of the five largest banks decreased to 52.99 and 52.94 percent, from 54.49 and 59.98 percents in the first half of 2015, respectively, while the remaining 17 banks had market shares ranging from 0.29 to 7.19 percents in deposits and 0.29 to 6.78 percents in assets, reflecting low competition in the market.

This, according to the report, was supported by the Herfindahl-Hirschman Index, HHI, of the industry (on a scale of 100 to 10,000) of 788.09 and 781.39 for deposits and assets, at end-December 2015, compared with 817.05 and 778.09 at end-June 2015, respectively. However, the report pointed out that notwithstanding the marginal improvement recorded relative to the first half of the year, the structure of the banking industry in the second half of 2015, remained oligopolistic.

“Most indicators of capital adequacy weakened during the period. The ratio of regulatory capital to risk weighted assets stood at 17.5 percent at end-December 2015, showing a marginal increase of 0.1 percentage point below the level at end-June 2015. Similarly, the ratio of tier 1 capital to risk weighted assets which stood at 17.4 percent at end-December 2015 was 2.2 percentage points below the level achieved at end-June 2015. This decline was attributable to the fall in the level of banks’ general reserves in the second half of 2015.

“At the end of December 2015, the baseline (pre-shock) capital adequacy ratio (CAR) for the banking industry, large, medium and small banks stood at 17.66, 18.48, 15.61 and 17.61 percent, respectively. These reflected 0.28, -0.08, 1.06 and 3.53 percentage points changed over the June 2015 positions.”

The industry ratio of non-performing loans (net of provisions) to capital increased to 7.4 percent at end-December 2015 from 5.5 percent at end-June 2015. “The December 2015 solvency stress test captured the idiosyncratic nature of individual bank’s balance sheet and macro-prudential concerns using the bottom-up and top-down approaches. The exercise covered the 23 Commercial and Merchant banks using the following risk elements: credit, liquidity, interest, foreign exchange rates and foreign exchange trading risks.

“For systemic and peer assessment, the banks were classified into three groups based on their asset size as follows: large banks are banks with assets greater than or equal to N1.0 trillion, medium banks have assets greater than or equal to N500 billion but less than N1trillion and small banks have assets of less than N500 billion.

“The banking industry and large banks’ resilience to credit risk was robust. A simulated severe shock of a 200 percent rise in NPLs resulted in CARs of12.77 and 16.52 percent for banking industry and large banks, respectively, which were above the 10 percent required regulatory minimum. However, medium and small bank groups showed vulnerabilities to severe shocks of 200 per cent rise in NPLs as their CARs fell to 7.16and 6.85 percent, respectively,” it stated.

The second half of 2015 witnessed a combination of events that portended shocks to the financial system. The decline in global growth, coupled with volatility in some of the major financial markets threatened the stability of the global financial system. The combination of macroeconomic and social disruptions in various regions noted in the June 2015 edition of the FSR persisted in the second half. The revenue shortfalls occasioned by the decline in commodity prices continued to give rise to severe fiscal contractions in some commodity exporting countries including Nigeria. The strengthening US dollar also continued to impact negatively on growth in many emerging market economies.

The December 2015 Financial Stability Report reviewed developments in the global and domestic economy. In the reporting period, the Nigerian economy continued to witness a slowdown in growth as the persistent decline in the international price of oil led to the decline in government revenue. The decline also impacted the quality of bank assets owing to their exposure to the oil and gas sector.

—  May 30, 2016 @ 01:00 GMT


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