The stress test conducted by the Central Bank of Nigeria (CBN) has shown that eight commercial banks have fallen short of the Capital Adequacy Ratio (CAR) required for international authorization.
The depreciation of the naira against the dollar and other foreign currencies has put pressure on the affected banks to raise their capital base and bridge the gap.
Through its 2021 guidelines, the CBN mandated the deposit money banks to maintain a prudential CAR of 10 percent for national and regional banks.
Individuals with international authorization must uphold a 15 percent regulatory CAR.
However, the CBN report showed a decline in the banking system’s CAR, dropping to 11.2 percent, which is 3.0 percent short.
The 15.0 percent threshold set for banks with international authorization is not met.
The decline in the banks’ CAR was attributed to a decrease in total qualifying capital relative to increased risk-weighted assets due to the naira’s depreciation following the adoption of a market-determined exchange rate policy. This reflects the challenges faced by these institutions.
The banks were scrutinized based on their capital strength and risk profile, a crucial measure of a bank’s financial stability.
The stress test was conducted to assess the banks’ financial health and their ability to withstand adverse economic conditions and shocks.
Specifically, the test focused on the CAR, which measures the proportion of a bank’s capital to its risk-weighted assets and is used to determine the bank’s financial stability.
The CBN sets the CAR as a regulatory requirement and expects each bank to maintain a minimum level of capital to ensure their ability to absorb potential losses.
The stress test results showed that the affected banks with international authorization did not meet the minimum regulatory requirement for their capital adequacy ratio set by the CBN.
This implies that these banks may have insufficient capital to meet potential losses during challenging economic conditions, which could potentially impact their overall financial stability.
The CBN’s revelation of the banks’ CAR falling below the minimum regulatory requirement emphasises the need for appropriate measures to be taken to address this issue.
It could prompt regulatory action, such as requiring the affected banks to raise additional capital or implement strategies to strengthen their financial position to mitigate any potential risks to the banking sector and the economy.
The depreciation, stemming from the CBN’s managed float of the exchange rate in June 2023, significantly impacted banks, leading to substantial foreign exchange losses.
It also affected the required capital for international, national, and regional banks.
He said: “Nigeria’s financial sector has demonstrated resilience in 2023, with key indicators of financial soundness largely meeting regulatory benchmarks.
“Stress tests conducted on the banking industry also indicate its strength under mild-to-moderate scenarios of sustained economic and financial stress, although there is room for further strengthening and enhancing resilience to shocks.
“Therefore, there is still much work to be done in fortifying the industry for future challenges, a topic that I will delve into later in my address.
“It is crucial for us to evaluate the adequacy of our banking industry to serve the envisioned larger economy.
“It is not just about the stability of the financial system in the present moment, as we have already established that the current assessment shows stability.
“However, we need to ask ourselves: Will Nigerian banks have sufficient capital relative to the financial system’s needs in servicing a $1.0 trillion economy in the near future? In my opinion, the answer is ‘no!’ unless we take action.
“Therefore, we must make difficult decisions regarding capital adequacy. As a first step, we will be directing banks to increase their capital.”
The report also outlined a positive trend in banks’ asset quality, with a marginal decrease in non-performing loans (NPLs) from 4.5 percent to 4.1 percent in the second quarter of 2023, reflecting improvement in loan recoveries and surpassing the prudential benchmark of 5.0 percent.
Furthermore, the industry liquidity ratio (LR) witnessed a significant rise, reaching 62.2 percent in the review quarter, surpassing the minimum regulatory benchmark of 30.0 percent.
This upswing signifies the banks’ robust capacity to fulfil their financial obligations.
The CBN’s disclosures underscored the pivotal need for banking institutions, particularly those with international authorization, to bolster their capital adequacy and effectively navigate the evolving economic landscape.
