Credit rating agency, Fitch Ratings, has said that the proposed foreign currency gateway bank announced by the Central Bank of Nigeria may have a negative impact on the liquidity of Nigerian banks.
This was revealed in the latest Fitch Ratings commentary on
Nigerian banks.
The apex bank Governor, Dr Olayemi Cardoso, recently
disclosed plans to introduce a new foreign currency gateway bank to ease the
country’s forex crisis.
In a television interview, Cardoso said the CBN was
“introducing a single FCY gateway bank to centralise all correspondent banking
activities, currently dominated by two major banks in the corresponding banking
space.”
The gateway bank termed the CBN’s medium-term plan is aimed
at solving Nigeria’s lingering forex problem by centralising all correspondent
banking activities.
Commenting on the proposal, Fitch Ratings said, “The
Governor of the CBN, Yemi Cardoso, also announced plans to establish a FC
gateway bank with the intention of centralising correspondent banking
activities, while asserting that a recent audit has determined $2.4bn of
overdue FX forwards invalid. Fitch believes these measures by the CBN may
negatively affect the banking sector’s FC liquidity.”
Meanwhile, due to about 70 per cent devaluation of the local
currency since end-2022, according to Fitch, banking sector impaired loans are
expected to increase at a faster pace than before the devaluation.
“Fitch expects the banking sector’s impaired loans (Stage 3
loans) ratio to increase at a faster pace than before the devaluation, which
itself has caused already material FC-denominated problem loans (Stage 2 and
Stage 3 loans; predominantly oil and gas sector loans) to have inflated
relative to gross loans and core capital and accentuated credit concentration
risks,” the credit rating firm said.
On the impact of the CBN circular prohibiting banks from
holding net long foreign currency positions, Fitch said that it would lead to a
further moderate depreciation of the naira.
“The Central Bank of Nigeria has published new circulars and
made a number of statements accompanying the recent devaluation. One circular
issued after the devaluation on January 31, aimed at increasing the supply of
FC, prohibited banks from having net long FC positions, and set February 1 as
the deadline for compliance.
“Net long FC positions have mitigated the impact of past
devaluations, including the recent devaluation, on capital ratios as they
result in foreign-exchange revaluation gains that cushion the impact of
inflated FC-denominated risk-weighted assets.
“Without net long FC positions, banks’ capital positions are
now more exposed to Fitch’s expectation of a further moderate depreciation of
the naira, but total capital adequacy ratios (CAR), in most cases, will remain
above regulatory minimum requirements,” the report said.
The CBN harmonised
the different segments of the foreign currency market in June, leading to a
significant devaluation in the naira.
The local closed last year at 899/$ at the official market.
Fitch said that the naira had undergone a second devaluation
as it stood at 1,516/$ as of February 13, which was about 40 per cent
devaluation.
“This exceeded Fitch Ratings expectations of a more moderate
depreciation in 2024. The large devaluation is the second within a year and has
converged the official exchange rate with the parallel market rate.
“The continued move away from a longstanding managed
exchange rate regime is conducive to restoring capital inflows and reducing
foreign-currency shortages that have weighed on economic activity in recent
years.
“However, it creates short-term macroeconomic risks, such as
accentuating already-high inflation (December 2023: 29 per cent year-on-year)
that may weigh on economic growth, heightening loan quality and capital
pressures already facing the banking sector,” it added.
The dollar was sold
for 1,537/$ at the official window on Friday and at the parallel market, it
exchanged 1,590/$1, a 1.57 per cent decline from 1,565/$ it closed the previous
trading session.