The recent increase in the risk weights for banks operating in the country is putting more pressure on the capital ratios for the banks, Fitch Ratings has said.
The rating agency however conceded that if the increase was successful in reducing banks’ credit concentrations in certain sectors, the changes could benefit asset quality and risk management.
The Central Bank of Nigeria (CBN) circular, issued on January 31, requires banks to increase risk weights for public sector loans to 200 per cent, from 100 per cent and for sectors greater than 20 per cent of the loan book to 150 per cent from 100 per cent.
Credit transactions between bank holding companies and their subsidiaries will also be regulated and risk-weighted to enhance regulation of a banking group.
Capital has been tightening at some banks as they expand their loan books following the Asset Management Corporation of Nigeria (AMCON)’s clean-up of the sector.
While Fitch Core Capital (FCC) ratios at end-September 2012 were 10 per cent to 30 per cent, some banks in the country currently have lower FCC than is appropriate for their growth in a difficult operating environment (Nigeria is rated ‘BB-’/Stable).
This is reflected in their low Viability Ratings (mostly in the ‘b’ range). Also, the generous dividend policies demanded by Nigerian investors mean internal capital generation is unlikely to support sustainable growth in the medium term.
The agency also noted that excessive credit expansion has been temporarily subdued by higher interest rates on government securities following the expiry of the interbank guarantee from the CBN in 2011. “But we still expect loans to grow 18 per cent to 20 per cent this year, close to the rate of inflation-adjusted economic growth as banks focus on increasing lending to government-sponsored projects, especially in the power sector. We see little appetite for fresh equity issuances in the market.
Some banks may want to fund growth with long-term subordinated debt. This does not count as loss-absorbing capital in our analysis, so further growth together with higher risk weightings would put core capitalisation under pressure.”
“The Nigerian banks continue to report capital ratios based on local GAAP equity rather than the IFRS adopted for financial reporting in 2012. This is the same approach as taken by some European regulators. We estimate the regulatory capital ratios for Nigerian banks would be 60bp-120bp lower if based on IFRS. FCC, our primary capital measure, adjusts IFRS equity for assets that are not fungible,” Fitch said.