Nigerian Banks’s Capital ratio at 3.4% under high stress scenario

LAGOS (Capital Markets in Africa) – Moody’s Investors Service conducted a scenario analysis to measure the solvency of Nigerian banks under a base-case scenario and an alternative stress scenario during the 2018-19 period. It noted that the base-case scenario reflects its current macroeconomic forecasts for Nigeria, while the stress scenario measures the banks’ capacity to withstand high stress conditions and includes a set of assumptions for loan and asset growth and income

reductions, among other variables. Under its base-case scenario, it expected the banks’ capital ratio to remain almost stable at about 17% of their risk-weighted assets during the next two years. It said that these estimates are driven by an increase in loan losses because of higher non-performing loans and risk-weighted assets that would be offset by higher pre-provision income, which would keep the banks’ capital ratio almost stable.

Under its stress scenario, the agency expected the impact on the banking sector to be more severe and projected the banks’ capital ratio to decrease sharply to about 3.4% of their risk-weighted assets at end-2019. It considered that these results would be worse than those of regional peers and would be mainly driven by a more pronounced increase in NPLs and a significant rise in loan-loss provisions over the next two years.

In parallel, it indicated that the introduction of international accounting standard IFRS 9 in 2018 will have negative implications on the capitalization of Nigerian banks and will reduce the average tangible common equity-to-risk-weighted assets ratio of Nigeria’s 10 largest banks by 150 basis points to 15% in the next two years. In addition, it expected the banks’ capital buffers to be supported by lower dividend pay-outs and low lending levels in the 2018-19 period.