In recent times, there have been concerns raised about the status of midsized banks operating in Nigeria.
Last month, Fitch Ratings disclosed that a number of Nigeria’s tier-2 banks (banks with total assets less than N2 trillion) will fall below the capital adequacy ratio of the Central Bank of Nigeria (CBN) should the Naira depreciate to N450 per Dollar.
Last Wednesday, the International Monetary Fund (IMF) released its Nigeria country report, noting that banks’ tier 1 capital ratio had declined to 10.8 percent in September 2017 from 16.3 percent in December 2016 and 17.1 percent in 2013, and is now at its lowest level in the past five years.
Also last Tuesday, the CBN released its bank stress test results, which showed that the banking system’s capital vulnerability is driven by midsize banks’ weaker capital conditions.
According to Moody’s Investors Service, these trends are credit negative for Nigeria’s midsize banks because they limit their loss-absorption capacity against unexpected losses and will restrain their asset growth and revenue generation.
It further said lower capital also will constrain Nigeria’s midsize banks’ capacity to grow their business, harming their revenue and delaying capital recovery through profit retention.
In its recent Credit Outlook, Moody’s said Nigeria’s midsize banks face greater risk of losing business to financial technology (fintech) companies because they tend to provide retail banking and payment services to individuals and small and midsize enterprises, a key entry target market for upcoming Nigerian fintechs.
Nevertheless, the CBN issued a directive in January this year limiting the amount of dividend payout ratios for banks with nonperforming loans and capital ratios beyond certain thresholds.
“We expect most banks to retain a large portion of their profits this year and build up capital cushions, although we believe profits will be small.
“Also, the improving Nigerian economy (we expect economy to grow 3.3 percent this year), following a contraction in 2016 and a slower growth of 1.7 percent in 2017, will ease the formation of new nonperforming loans in the next 12-18 months,” the report said.
Source: Business Post