“We expect the bankers’ committee to lobby the Central Bank for a review of these intended changes” Renaissance Capital, RenCap, said in a report analysing the new regulatory directives by the Central Bank.
As part of efforts to entrench risk management in banks, the Central Bank of Nigeria (CBN) said it had reviewed the risk weights assigned to some certain exposures in the industry.
The banking sector regulatory body said this in a letter with reference number: “BSD/DIR/GEN/LAB/06/003,”dated January 31, a copy of which was posted on its website.
The letter, titled: “Review of Risk Weights on Certain Exposures in the Computation of Capital Adequacy,” was approved by Tokunbo Martins, the Director of Banking Supervision of the Central Bank of Nigeria.
The Central Bank raised risk weighting on banks’ loans to the public sector from 100 per cent to 200 per cent.
Finance experts say this is effectively discouraging states and local governments from crowding out private sector credit growth and that only quite a few of the banks have close to 10 per cent of the loan books exposed to the public sector.
The regulatory body also said that where the exposure to any industry economic sector is in excess of 20 per cent of the total credit facilities of a bank, the risk weight of the entire portfolio shall be 150 per cent, up from 100 per cent.
It added that the total exposure to a particular industry would include off-balance sheet engagements in which the bank takes the credit risk, and that breaches of single obligor limits (loans to any client capped at 20 per cent of capital) to be impairment against capital calculation.
The Central Bank also said that investments in Federal Government of Nigeria Bonds shall continue to attract zero per cent risk weight. However, State Government Bonds that meet the eligibility criteria set out in the Guidelines for Granting Liquidity Status for State Government Bonds would continue to be risk weighted at 20 per cent.
Renaissance Capital said the banks, which could be affected by some of the loan book modalities due to the concentration of their books, include First Bank, Access Bank, Skye Bank, Diamond Bank, FCMB, and Stanbic IBTC.
It said the banks appear to have been partially successful in getting the Central Bank to agree to less stringent measures, after discussions with several management teams.
“We expect a revised circular to be released soon which may show the following: Delay in implementation – in our view, implementation date could be pushed back as far as January 2014.
“The 20 per cent caps may be applied at the sub-sectors and not at the super-sector level. We understand, for example, that the components of Oil &Gas sector (Upstream/Downstream/Services) could be viewed as separate sectors with a 20% cap on each sector. This is positive for banks with high Oil & Gas concentration – First Bank, Access, Diamond, Skye and FCMB”.
“The 200 per cent weighting on public sector loans may be revised back to 100 per cent as the banks argued that this sector is already capped at 10 per cent of loan books,” he said.
Capital Adequacy Ratio (CAR) (the ratio which is used to protect depositors and promote the stability and efficiency of finance institutions and the industry in general) is expected to be negatively impacted should these risk weightings be implemented on the current balance sheets, according to the finance firm.
“If the above changes to the circular are made we believe there will be limited impact on CARs – this could turn out to be a storm in a teacup” the Renaissance Capital said.
Concerns on funding costs
With yields on fixed term deposits falling, all banks expect lower funding costs this year, according to RenCap.
Most of the banks are targeting deposit growth ahead of loan growth and everyone is seeking to grow proportion of cheap deposits.
The investment bank said most banks were mildly concerned about the removal of ATM fees (smaller banks more than bigger banks) but all were more worried about the potential reduction in COT fees.
It added that all these factors point to an expectation of some pressure of growth in banks’ funding cost.
The recent crisis in the Nigerian banking industry highlighted several weaknesses in the system, key of which was the excessive concentration of credit in the asset portfolios of banks, according to the regulatory body.
“Past experience revealed concentrations across products, business lines, and legal entities. The management of concentrations, or pools of exposures, whose collective performance may potentially affect a bank negatively, needs to be properly managed through the establishment of sound risk management processes” the Central Bank stated, in the circular.
The regulatory body said the move is without prejudice to the risk management control functions put in place by banks and discount houses to mitigate credit concentration risks. It said its decision is line with its risk based supervisory review process and it has reviewed the risk weights assigned to some identified exposures.
All banks and discount houses were required to ensure compliance with this directive immediately.