If the naira continues to decline against the dollar and eventually falls to N1,000 to the greenback, the impact could result in Nigerian banks’ capital ratios falling to single digits, analysts at leading international financial firm, Exotix Partners, have said.
The naira, at a point last week, fell to N496 to the dollar on the parallel market. In a note obtained by New Telegraph, the experts stated that their stress test analysis of Nigerian banks shows that the lenders are in a very difficult situation, adding that the weakening naira will bring additional challenges for the lenders.
They said: “Our stress test does not take into account any impact on Tier-1 or total capital from currency weakness.
Further, the stress test assumes no change in Naira-denominated risk-weighted assets as FC-denominated Risk Weighted Assets (RWAs) rise, and assumes the banks take no remediation measures (such as asset sales) to offset the impact of a weaker local currency.
These are important caveats as in our stress test, all the banks end up with single-digit total capital ratios in the most extreme scenario of N1,000/US$.”
The analysts, however, stated that although they did not expect their prediction to come to pass, they were concerned that given the lingering disparity between parallel and official exchange rates and the ability of the Central Bank of Nigeria (CBN) to continue to support the naira, it was vital that they continue to assess the potential impact of significant naira weakness on the banks.
The experts said: “We believe GT Bank and Zenith Bank are best placed to weather further potential naira weakness.
These two banks’ capital ratios remain the highest in the peer group in our currency stress test.” Besides, they stated: “We see GT Bank as the most resilient.
We think GT Bank is best placed to navigate the challenging operating environment. Zenith Bank also has solid fundamentals. Like GT Bank, this lender fares relatively well in our currency-based stress test.
Access Bank has so far exceeded expectations on almost all fronts, including capital and asset quality, and profitability compares well to most peers. We believe valuations of the FBN bonds already reflect the challenges there.”