The Central Bank of Nigeria (CBN) in its Financial Stability Report released yesterday, said a change in the status of loans of the largest obligors from performing to lost would lead to a fall in the Capital Adequacy Ratio of small banks.
Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and liabilities, determining a bank’s solvency.
The apex bank said a fall from 3.14 per cent to a negative of -24.44 per cent would impact negatively on the banks.
According to the report, with a deterioration of the quality of assets in the Nigerian banking industry which has seen the ratio of non-performing loans to assets rising to 14 per cent as at the end of last year, small banks whose assets base are around N500 billion are more at risk of becoming insolvent if the situation gets worse.
Average non-performing loans ratio in the banking industry rose to 14 per cent as at December 2016 compared to an average of 11 per cent that was recorded as at June 30, 2016 reflecting the downturn in the Nigerian economy as more companies were unable to meet their obligations.
A breakdown of banking industry loans show that oil and gas sector accounts for the largest portion of their loans taking up 29.59 per cent of total banking industry credit, while Manufacturing, General, General Commerce, Government and Others, constituted 13.41, 8.71, 6.25, 8.34 and 33.70 per cent, respectively, at the end of last year.
The Financial Stability report showed that medium and small banks have more oil and gas credit concentration risk than the large banks, despite their smaller proportion of exposure to the sector. The report noted that the stress test result of a 20 per cent default in oil and gas exposures will lead to CARs of 13.98, 14.67, 11.87 and 2.63 per cent for the banking industry, large, medium and small banks, respectively.
However, with a more severe shock of 50 per cent default in exposure to the sector, only the large banks will have CAR of 10.17 per cent which is above the regulatory threshold. Medium and small banks CARs will fall to 6.96 and -0.14 per cents respectively.
The banking industry solvency stress tests indicated that the resilience of banks to moderate and severe shocks deteriorated marginally during the review period. Although the sector is more exposed to credit concentration and default risks, there were no significant systemic threats.
The report noted that the decline in CAR was due to a “slight decline in total qualifying capital from increased provisions for loan losses and a corresponding increase in risk weighted assets. The decline in the asset quality was driven by a decline in oil prices which impacted on the obligors in the oil and gas sector and by extension the banking industry in view of its large exposures to the sector. The monitoring exercise revealed an acceptable level of compliance to the recommendations.”
Meanwhile the CBN said it had revoked the license of 21 finance companies who had not met the N100 million capitalization requirement and had granted 90-day extension for nine FCs having approved 40 that met the new capital requirement.
It noted that while the licenses of 13 finance companies that did not meet the new capital requirement were approved for revocation, the licenses of eight other FCs were approved for revocation for voluntary surrendering of licenses, insolvency and discontinuation of finance company business.
“The appointment of liquidators to wind up the activities and the publication of the names of all the institutions approved for revocation in the Federal Gazette in line with Section 60 of BOFIA was also approved by the bank.” The report read.