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Fitch Sees Nigeria’s Punitive Bank Rules Weighing on Earnings - BLOOMBERG

AUGUST 13, 2020

BY  Emele Onu 


(Bloomberg) -- Nigeria stands out for punishing its banks at a time when most other countries are giving lenders extra leeway to fight the economic fallout of the coronavirus, according to Fitch Ratings.

“The Central Bank of Nigeria has been highly interventionist,” Mahin Dissanayake, senior director for Europe, Middle East and Africa bank ratings at Fitch, said in an interview.

Where peers like South Africa and Kenya followed the global trend of giving banks more room to lend, Nigeria hasn’t budged. Instead, it stuck with a cash reserve ratio that compels lenders to park 27.5% of their deposits with the central bank. “The CRR is unique and hugely punitive,” said Dissanayake. The regulation is aimed at reducing the amount of money in the financial system to keep inflation in check.

Leaving cash idle in a non-interest bearing account pressures earnings, he said, because the cash could’ve been put to better use, like lending. Failure to meet the threshold results in the regulator debiting banks’ accounts with the shortfall. The central bank also dips into the accounts when banks miss a target to extend 65% of their deposits as loans, a measure aimed at stimulating credit. This and other penalties push the effective hit on capital to between 40% and 50%, Dissanayake said.

The central bank also dips into the accounts when banks miss a target to extend 65% of their deposits as loans, a measure aimed at stimulating credit. This and other penalties push the effective hit on capital to between 40% and 50%, Dissanayake said. The rules “are aimed at two different monetary policies,” he said. “They are conflicting.” A spokesman for Nigeria’s central bank didn’t respond to a text message seeking comment that he requested.

Fitch revised its outlook for Nigerian banks to negative toward the end of last year as the economy started slowing and the central bank ramped up intervention.

‘Economic Shocks’

“Nigerian banks compared to other markets operate in a volatile environment,” Dissanayake said. “The banks have to deal with economic shocks, short credit cycles and persistent problems in the oil sector. They also have to deal with policy actions, policy uncertainty and regulatory risks.”

There are some positives. Having about 21 major banks serve a population of about 200 million in a $450 billion economy gives lenders a solid market position, he said. This strong revenue-generating capacity allows banks to absorb the higher cost of risk even when income from interest charges on loans deteriorate.

The first half of the year saw lenders book large trading and foreign-exchange reevaluation gains that shielded them from lower yields on government-bond holdings, slower loan growth and less client activity. But the fallout from the Covid-19 outbreak may show in the second half, weighing on 2020 earnings.

“On the revenue side, we forecast about a 20% decline,” Dissanayake said. “Profitability is going to decline, but the degree depends on the extent of loan-impairment charges recognized in the year and the size of trading and translation gains.”

Read more at: https://www.bloombergquint.com/onweb/fitch-sees-nigeria-s-punitive-bank-rules-weighing-on-earnings

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