Rising inflation could hurt credit growth, DataPro warns
As GTCO says rising prices to induce rates hike
The positive credit momentum seen at the beginning of the year could be cut short by inflationary pressures across the globe, DataPro, the rating agency has warned.
While the credit momentum reflected the favourable financing conditions and a powerful economic recovery from the constrained imposed by Covid-19 restrictions, “this could be derailed if persistently high inflation pushes central banks to aggressively tighten monetary policy, triggering significant market volatility and repricing risks,” DataPro warned in its assessment of Nigeria’s Credit Outlook in 2022.
“Persistent inflation, tied to supply chain disruptions and soaring energy prices, could trigger wage inflation and push the CBN to hike interest rates sooner and faster,” the rating agency noted, noting that this could generate market volatility, likely amplified by elevated debt levels.
This comes as GTCO Holdings Plc (former Guaranty Trust Bank Plc) noted that low rates on fixed-income securities would force local banks to seek opportunities for credit expansion in the year.
“The relatively low yield on fixed income securities (FIS) will mount pressure on banks to intensify credit creations to the private sector which will in turn increase competition for quality loans amongst banks and cause funding cost to inch up slightly. The pressure on funding could
also trigger a complementary repricing on deposits in line with current market realities,” GTCO said in its macroeconomic preview of the Nigerian economy for 2022.
GTCO noted that the banks would continue to look for innovative ways to grow noninterest revenue as well as consumer and retail loans. “In view of an expected increase in government borrowing on the back of a higher budget deficit and dwindling revenue, a lowinterest rate regime might not hold for much longer,” said.
On its part, DataPro said that globally, banks will be able this year to maintain the improved performance they achieved in 2021 on the back of the easing of COVID-19-induced restrictions. It noted however that different types of risks lurk across regions. According to it, 2022 should see acceleration in the regulatory debate on less traditional risk types, including environmental and technologyrelated risks.
“The Basel Committee, for instance, recently published a consultation paper on a principles-based approach for the effective management and supervision of climate-related financial risks. It is believed that banks will, next year, accelerate their initiatives to embed these risks into their credit culture, strategy, and risk management,” DataPro noted.
The Basel Committee came up last year with Basel III, which modified the former Basel II framework. According to GTCO, the new framework seeks to achieve stronger capital and liquidity positions for banks for improved stability of the global financial sector. It said the new framework is expected to strengthen capital levels and quality, as well as enhance the liquidity position of banks.
These are regulatory reforms designed to safeguard the international banking system, maintaining certain ratios and reserve capitals.
The changes introduced in Basel III include the division of Tier 1 Capital into Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) Capital with minimum ratios of 10.5 percent and 0.75 percent respectively. Previously, under Basel II, banks’ capital was only split into Tier 1 and Tier 2.
The new classifications also introduced a Liquidity Coverage Ratio (LCR) to the existing performance ratios of banks, GTCO noted. This ratio requires banks to “hold sufficient high liquid assets, strong enough to survive a specified period of stressed funding scenario,” the bank noted.
The new framework also specified a minimum capital requirement of 15 percent for DMBs with an additional 1 percent for Banks designated as DSIB (16 percent). Similarly, an additional 1 percent capital buffer for Capital Conservation Buffer (CCB1) will be required under Basel III which takes the total minimum capital requirement to 16 percent for Banks and 17 percent for DSIBs.
The new guidelines also introduced a Countercyclical Capital Buffer (CCB2) which has been set within a range of 0-2.5 percent and shall be determined by CBN from time to time. The CCB2 is currently set at 0 percent by the CBN, according to GTCO.
“Generally, the capital requirements under Basel III are more stringent to prevent banks from taking undue risks that can impact the financial system,” the bank noted.
In the rating space, DataPro expects “speculative-grade defaults” to remain low this year, but on the condition that there are no policy surprises or economic setbacks. “Abundant and cheap liquidity, increased risk appetite, and investors’ search for yield has led to strong credit demand across the ratings scale, allowing corporates to refinance debt and extend maturities, limiting near-term refinancing risks,” it noted. It warned however that defaults could arise from new financing risks, shorter maturities in certain industries, and regions most relying on market liquidity, adding that even bankruptcies could also rise among small and mid-size businesses.