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Nigerian Banks Post-AMCON: Basel requirements to drive capital raising

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In North America, it is a given that in every decade a financial crisis occurs. In Nigeria, the Banking structure has only gotten deeper roots in recent times and there are no adequate time series data to estimate the regularity and timing of a financial crisis.

However in light of increased borrowings to the real sector and large ticket deals in the Oil & Gas sector with plenty more to come, it is important to highlight structural weaknesses in the system if any, and a method to rectify them.

Going forward Basel requirements will drive capital raising for lenders.

Recently, the CBN issued a circular in January 2014 mandating banks to implement the Basel II and Basel III guidelines for risk management with the minimum capital adequacy ratio (CAR) computation under Basel II rules to commence fully in June 2014.

The CBN’s regulatory minimum CAR is 10 percent for local banks and 15 percent for banks with international operations, above the Basel recommended minimum of 8 percent.

Looking at some banks that have made the headlines since releasing their half year results, Zenith Bank, GTBank, Diamond Bank and Wema Bank; it is observed from company reports of Zenith bank that its Pre-Amcon (2010) CAR was 33 percent, deteriorating by 600 basis points from 33 percent to 27 percent in 2011 after the restructuring process in the industry.

At the end of 2013, Zenith Bank’s capital adequacy ratio (CAR) stood at 26 percent but since the implementation of Basel II, the CAR as at half year 2014 is recorded to be 22.6 percent according to company filings.

GTBank on the other hand showed less erratic movements in its Capital Adequacy Ratio (CAR) after the restructuring that took place in the industry.

Pre-AMCON, GTBank had a recorded CAR of 20.81 percent in 2010, its CAR position dropped marginally to 20.48 percent in 2011.
At present, according to its Basel Pillar 3 disclosure released along with its 2013 results, its CAR as at year end 2013 has improved to 25 percent.

Diamond Bank has improved its CAR as well, from a low of 13.9 percent in 2011 after the restructuring process in the industry after dropping by 270 basis points from 16.6 percent in 2010.

At half year 2014, with Basel II implementation, its CAR stands at 17 percent. A slight drop from 17.3 percent at year end 2013 but a huge improvement from 2010/2011.

Wema Bank, which increased revenue by 22 percent in Q2 from 2013, recorded the lowest CAR of the four banks at -12.44 percent in 2010.
Post-AMCON, in 2011 it recorded a CAR of -13 percent declining further to -16% in 2012.

Currently, based on year end 2013 results, its CAR however stands at 27 percent.

It would be interesting to see if there is a change in CAR once Basel II rule are fully implemented and disclosures are released.

The Basel directives are designed by The Basel Committee on Banking Supervision (BCBS), a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten countries in 1974.

Basel II was initially published in June 2004 to create an international standard for banking regulators to control how much capital banks need to put aside, to guard against the various risks the banks expose themselves to.

On the other hand, Basel III, a response to the 2008-2010 banking crisis, strengthens bank capital requirements on liquidity and leverage. It ensures that banks have core capital, different from other types of capital, such as hybrid capital, as obtains in developed economies.

Since the Nigerian banking crisis of 2009, Nigerian Banks have gotten bigger and stronger. The Banker magazine ranked 13 Nigerian banks among the world’s top 1000 banks for the second consecutive year.

An IMF report on the banking industry released last year points out that the improvements in the industry reflects the high capitalization and currently low NPL ratios of commercial banks, which in turn reflects the banking system restructuring and recapitalization after the 2009 domestic banking crisis.

The capital bases of the banks have been strengthened and some banks are in the process of strengthening it further.

The ratio of non-performing loans to total loan portfolio has generally reduced in the industry. However, there is still a need for greater diversification of the loan portfolio.

From the stress test conducted in 2012 by the CBN, Tokunbo Martins, director of banking supervisions at CBN reports that most Nigerian Banks would be resilient in face of a prolonged downturn in oil prices and defaults by oil marketers.

Martins added that “banks are mostly holding good quality tier one capital.”

Nevertheless, a joint CBN-IMF stress test conducted in May 2013 revealed that while the Nigerian commercial banking system as a whole can absorb credit and market risk shocks, withstand liquidity pressures, and absorb moderate potential losses, it is exposed to credit concentration risk.

According to the IMF report from the stress test, “the banking system as a whole is quite robust, some individual banking institutions appear vulnerable, and one is insolvent even before any stress test.”

Article Credit: Businessdayonline

Updated 4 Years ago

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