Banks face high forex risks over devaluation – Fitch


The global rating agency, Fitch Ratings said on Thursday that Nigerian banks faced high foreign exchange risks following the devaluation of the naira by the Central Bank of Nigeria, CBN.

“The recent surge in banks’ dollar debt funding and lending leaves banks more vulnerable to foreign exchange risks, especially if there is further devaluation,” Fitch Ratings said in a statement.

“The Central Bank of Nigeria’s move on Tuesday to devalue the naira and raise interest rates will have only a limited impact on Nigerian banks at present, but foreign exchange risks are high for the sector,” the agency added.

The global rating agency noted that Nigerian banks had raised funding internationally over the last year owing to stronger investor appetite for Nigerian debt.

On the long run however, the country’s banks should overcome the effects of the CBN policies, it noted.

“Around 40 per cent of Nigerian banks’ lending is in foreign currency, but they have small net long balance sheet positions to foreign exchange, so the impact of the weaker naira on banks’ credit risks, liquidity and solvency is likely to be manageable,” Fitch said.

The CBN had devalued the mid-point of the naira’s official trading band from N155 per dollar to N168 and widened the band significantly.

The CBN also raised the benchmark interest rate to 13 per cent, from 12 per cent, the first change since October 2011, and the Cash Reserve Requirement on private sector deposits to 20 per cent, up from 15 per cent.

Fitch noted that “Nigerian banks’ Viability Ratings, which reflect their intrinsic credit strength, are low (in the ‘b’ range) and incorporate the challenging and volatile operating environment in Nigeria, so the policy move is unlikely to change the ratings.”

According to the global rating agency, the interest rate hike will not necessarily lead to higher impaired loans, but noted that higher funding costs would compress margins.

Fitch said the development would lead to mark-to-market losses on government securities held in available-for-sale portfolios, although the impact on capital is likely be moderate.

Fitch expects cost of funding to rise because of further tightening in inter-bank liquidity owing to the higher CRR.

It said, “The CRR on public sector deposits remains unchanged at 75 per cent. The recent surge in banks’ dollar debt funding and lending leaves banks more vulnerable to foreign exchange risks, especially if there is further devaluation. Nigerian banks have raised funding internationally over the last year helped by stronger investor appetite for Nigerian debt.”

“All Fitch-rated banks are below the new limits, but we believe only four have sufficient capacity to raise benchmark size amounts within the constraints, so issuance volumes are likely to fall.

“The new net open position cap is also likely to curb the rise in US dollar lending, predominantly for the oil, gas and power sectors, where demand has been strong. Nigerian banks typically lend in foreign currency only to major corporates that have dollar income. Nevertheless, as corporates extend their forex borrowings, the devaluation could impact their debt servicing ability and raise asset quality risks for banks.”

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