Credit standing company, Fitch Scores, has stated that the proposed overseas forex gateway financial institution introduced by the Central Financial institution of Nigeria could have a unfavourable affect on the liquidity of Nigerian banks.
This was revealed within the newest Fitch Scores commentary on Nigerian banks.
The apex financial institution Governor, Dr Olayemi Cardoso, not too long ago disclosed plans to introduce a brand new overseas forex gateway financial institution to ease the nation’s foreign exchange disaster.
In a tv interview, Cardoso stated the CBN was “introducing a single FCY gateway financial institution to centralise all correspondent banking actions, presently dominated by two main banks within the corresponding banking area.”
The gateway financial institution termed the CBN’s medium-term plan is geared toward fixing Nigeria’s lingering foreign exchange drawback by centralising all correspondent banking actions.
Commenting on the proposal, Fitch Scores stated, “The Governor of the CBN, Yemi Cardoso, additionally introduced plans to determine a FC gateway financial institution with the intention of centralising correspondent banking actions, whereas asserting {that a} current audit has decided $2.4bn of overdue FX forwards invalid. Fitch believes these measures by the CBN could negatively have an effect on the banking sector’s FC liquidity.”
In the meantime, as a result of about 70 per cent devaluation of the native forex since end-2022, in line with Fitch, banking sector impaired loans are anticipated to extend at a quicker tempo than earlier than the devaluation.
“Fitch expects the banking sector’s impaired loans (Stage 3 loans) ratio to extend at a quicker tempo than earlier than the devaluation, which itself has precipitated already materials FC-denominated drawback loans (Stage 2 and Stage 3 loans; predominantly oil and gasoline sector loans) to have inflated relative to gross loans and core capital and accentuated credit score focus dangers,” the credit standing agency stated.
On the affect of the CBN round prohibiting banks from holding web lengthy overseas forex positions, Fitch stated that it might result in an extra average depreciation of the naira.
“The Central Financial institution of Nigeria has revealed new circulars and made numerous statements accompanying the current devaluation. One round issued after the devaluation on January 31, geared toward rising the provision of FC, prohibited banks from having web lengthy FC positions, and set February 1 because the deadline for compliance.
“Internet lengthy FC positions have mitigated the affect of previous devaluations, together with the current devaluation, on capital ratios as they end in foreign-exchange revaluation good points that cushion the affect of inflated FC-denominated risk-weighted property.
“With out web lengthy FC positions, banks’ capital positions are actually extra uncovered to Fitch’s expectation of an extra average depreciation of the naira, however complete capital adequacy ratios (CAR), generally, will stay above regulatory minimal necessities,” the report stated.
The CBN harmonised the completely different segments of the overseas forex market in June, resulting in a big devaluation within the naira.
The native closed final 12 months at 899/$ on the official market.
Fitch stated that the naira had undergone a second devaluation because it stood at 1,516/$ as of February 13, which was about 40 per cent devaluation.
“This exceeded Fitch Scores expectations of a extra average depreciation in 2024. The big devaluation is the second inside a 12 months and has converged the official trade price with the parallel market price.
“The continued transfer away from a longstanding managed trade price regime is conducive to restoring capital inflows and lowering foreign-currency shortages which have weighed on financial exercise in recent times.
“Nevertheless, it creates short-term macroeconomic dangers, corresponding to accentuating already-high inflation (December 2023: 29 per cent year-on-year) that will weigh on financial development, heightening mortgage high quality and capital pressures already going through the banking sector,” it added.
The greenback was offered for 1,537/$ on the official window on Friday and on the parallel market, it exchanged 1,590/$1, a 1.57 per cent decline from 1,565/$ it closed the earlier buying and selling session.
