Fitch Ratings has declared that reducing reserve requirements to 25 per cent will not add liquidity to the Nigerian banking system because the reduction will not lead to additional Foreign Currency (FC).
noted that substantial government-related FC deposits are exempt from
reserve requirements and have already been withdrawn from the system
after the government ordered all public-sector deposits to be moved from
commercial banks into the centralised Treasury Single Account (TSA)
earlier this month.
Nigeria’s Monetary Committee reduced mandatory reserve requirements
on all local-currency (LC) deposits to 25 per cent from 31 per cent last
week in the hope that this might ease liquidity pressure, stimulate new
lending and boost economic growth.
According to Fitch, “This should provide some additional LC liquidity
into the banking system but around N1.3trillion (USD6.5billion) of
deposits were sucked out of the banks in September, reflecting transfers
to the TSA. Public-sector deposits traditionally account for around 10
per cent of total banking sector deposits. Lower reserve requirements
will not offset the tighter FC liquidity at Nigeria’s banks. A currency
split of public-sector deposits is not disclosed but in our opinion, FC
deposits are substantial, held up by oil-related deposits.”
“ The centralising of public-sector and government-related FC
deposits at the TSA has made it increasingly difficult for commercial
banks to meet customer demand for FC. FC availability was already
strained in 2015 due to falling oil revenues, central bank action to
defend naira depreciation and heightened negative investor sentiment
towards emerging markets.
“Warnings throughout the year that JP Morgan intended to remove
Nigeria from its Emerging Markets index, which occurred in
mid-September, also triggered heavy FC outflows as investors sold
Viability Ratings assigned to Nigeria’s banks, all in the ‘b’
category, already reflect a wide range of weaknesses, including the
increasingly strained FC liquidity position. Our sector outlook for
Nigerian banks remains negative. Key financial metrics reported by
Nigerian banks are likely to continue to weaken in the closing months of
2015. Impaired loans have been rising over the past 12 months” Fitch
We expect them to rise above the central bank’s informal 5 per cent
of total loans cap but to remain below 10 per cent at year-end. Pressure
is mounting on regulatory capital ratios and we expect Tier 1 capital
ratios at many banks to fall below 15 per cent, which is low by recent
Nigerian standards. Loan growth is slowing under the strain of lower oil
prices. Our expectations for loan growth are muted – a nominal 5 per
cent increase in 2015, which is low by Nigerian standards – due to the
much deteriorated operating environment.