Report: Tier 1 Banks Have Sufficient Buffers to Overcome Challenges

Analysts at Renaissance Capital Limited (RenCap) have identified four Nigerian tier 1 banks under their coverage that are best placed to pull through the challenges in the economy as Guaranty Trust Bank (GTBank), Access Bank, Zenith Bank and United Bank for Africa (UBA).

The research and investment firm in a report titled: “Nigerian Banks-Fantastic Four,” also held the view that the tier 1 banks have sufficient capital buffers in the event of naira devaluation and asset quality trends. It noted that although the industry’s asset quality had deteriorated, the tier 1 banks have been much better than sector- wide trends.

“For the sector overall, we think the challenges are mainly around capital and asset quality. FX liquidity challenges should improve in the short term, and we think there is scope for the Central Bank of Nigeria (CBN) to improve naira liquidity if the need arises – the effective cash reserve requirement (CRR) is currently 27.5 per cent, and it could be reduced if the banks are challenged for naira liquidity,” it added.

The report noted that the sector’s non-performing loans (NPLs) were yet to bottom out and anticipated some deterioration in the sector over the next few months.

“We estimate that in the event of a further 50 per cent devaluation in the naira, of the tier 1 banks only Access Bank and Zenith Bank would have capital adequacy ratios (CARs) above the regulatory minimum.

“However, if we factor in revaluation gains from a devaluation, this should also provide GTBank and UBA with sufficient capital buffers,” it stated. It also held the view that a second Asset Management Corporation of Nigeria (AMCON) scenario was unlikely because: the country lacks the financial resources to fund such a programme; and the banking sector is in a much stronger position today than seven years ago, despite current headwinds.

Commenting on the new FX actions by the CBN, the RenCap report which described the measures as a move in the right direction, however stressed that they fell short of a full liberalisation.

“The CBN plans to use the $5 billion in FX reserves it has built up (via a deliberate policy of building up reserves since November) to increase liquidity in the interbank market and make FX available for retail transactions (including travel allowances and school and medical fees). This will affect about 20 per cent of FX transactions,” RenCap’s economist, Yvonne Mhango.

“The CBN has introduced FX flexibility with respect to retail transactions by allowing them to take place at an FX rate not exceeding 20 per cent above the interbank FX rate. We take this to mean that retail transactions can be settled at any rate in the N315-380/$ range.

“While we think this will provide much-needed shortterm FX liquidity relief for the banks, it does not necessarily address all the current issues. FX policy remains interventionist, with the CBN still providing guidance on the FX rate,” it added.