Rising Inflation Affecting Banks’ Capacity To Raise Funds

Recent ratings of the Nigerian banking industry show that many banks in the country are in dire need of capital, but the rising inflation in the count...

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Recent ratings of the Nigerian banking industry show that many banks in the country are in dire need of capital, but the rising inflation in the country is making it difficult and expensive for them to raise the needed funds.

The rate at which the price of goods and services increased in Nigeria had risen higher in October to 18.33 per cent from 17.9 per cent as at September 2016 according to the National Bureau of Statistics. Implying that fundraising will become more expensive as interest is expected to be higher than inflation to yield positive interest rate.

The need for the injection of fresh funds was emphasized recently when Moody’s Investors Service assigned national scale ratings (NSRs) to seven Nigerian banks. The report highlighted the urgency for some banks to raise funds at the international market to meet up with foreign currency obligations, a feat that may prove hard considering the inflationary situation of the country.

Moody’s had seen resilience in the books of Guaranty Trust Bank, Zenith Bank, Access Bank, First Bank Nigeria and United Bank for Africa.

However, an analyst who spoke with Leadership noted that Sterling Bank will not be the only bank facing the precarious situation of raising funds. The analyst noted that all tier2 banks in the country will need to raise funds due to the level of their capital adequacy ratio which is falling below regulatory boundaries.

Analysts say with inflation at 17.9 per cent and likely to continue its rising trend; banks seeking to raise capital will need to offer coupons above 18 per cent to attract any investor.

Asides this, analysts say the banks will need to tactically seek out strategic investors who believe in them to invest in the bank otherwise they will have to raise expensive funds with no real hope of realizing the whole amount they set out to raise.

Moody’s also assigned to Zenith Bank Plc Aaa.ng/NG-1; Guaranty Trust Bank Plc Aa1.ng/NG-1; Access Bank Plc  Aa2.ng/NG-1 and United Bank for Africa Plc Aa2.ng/NG-1. Despite the rising non performing loans in the Nigerian banking industry, Mood’s said the bank’s balance sheet and level of profitability as well as a strong asset base will keep them resilient to the downsides of the rising NPLs.

It however noted that compared to local peers, FBN is faced with higher provisioning costs ahead, posed by its high stock of NPLs and low NPL coverage ratio, which could undermine the bank’s earnings-generating capacity and expose capital if the difficult operating environment persists or worsens.

FBN’s national scale ratings of A2.ng/NG-1 according to Moody’s capture the bank’s high and resilient pre-provision profitability, with the H1 2016 annualised pre-provision profits amounting to around 4.7 per cent of total assets; and stable, deposit-based funding structure and high liquidity buffers in local currency.

“These strengths are balanced against the bank’s deteriorating asset quality metrics, with NPLs accounting for around 23 per cent of gross loans as of June 2016 (against a system average of around 11.7per cent) reflecting historically weak underwriting standards and the currently challenging operating domestic environment, as well as significant exposures to the troubled oil and gas sector and a high proportion (over 50 per cent) of foreign currency lending.

“These exposures make FBN relatively more sensitive to downside risk scenarios than its immediate domestic peers; tight foreign currency liquidity (borrowings from correspondent banks declined to N14 billion in 2015 from N188 billion in 2014) and modest capitalization buffers.”

Source: Rising Inflation Affecting Banks’ Capacity To Raise Funds |