Banks survive regulatory stress test amidst tense corporate governance challenges

The systemic head­wind blowing within the Nige­rian financial sector is far from ablating despite recent reforms in the in­dustry as latest report by the Central Bank showed that corporate gover­nance and risk manage­ment breaches continued to threaten the safety of funds in the sector.

The Financial Sustain­ability Report released by the CBN over the weekend, revealed that although the banking industry remained resilient to liquidity stress, test results conducted on most of the banks indicated deterioration in their’ resil­ience, compared with the position in the preceding period.

The CBN report had ex­amined 21 banks and 14 foreign subsidiaries of Ni­gerian banks with most of the banks having stable out­look in their composite risk rating and improvements in their internal audit and financial analysis functions.

It revealed also that the stress test conducted, based on their end-December 2013 call reports indicated that the banking industry was stable and resilient.

But detailed analysis of the report indicated that owing to deterioration in some of the banks’ smaller operators may require ad­ditional N89.15 billion to raise the Capital Adequacy Ratio of banks with mini­mum CAR of 10.0 per cent.

The CBN had stipulated minimum CAR of 10 per cent for local banks, 15 per­

cent for international banks and 16 percent for Sys­temically Important Banks (SIBs).

The apex bank, noted that report, as at December 2013, the average CAR for the small banks deteriorat­ed to 5.56 per cent (below the required minimum of 10.0 per cent), from 18.33 per cent.

It stated that under this scenario, 15 banks main­tained CARs above 10.0 per cent, 5 banks had CARs between 5.0 and 10.0 per cent and 3 banks had less than 5 per cent CARs.

The report explained that the banking industry resilience to credit risk sus­tained an upward trend as the average industry CAR stood at 12.42per cent under

a shock scenerio of 200 per cent rise in non performing loans (NPLs) as the large banks and medium sized banks were less vulnerable to general credit risks with their average CARs declin­ing from 17.64 per cent to 12.21 per cent and 17.03 to 11.45 percent, respectively.

Said the report, “The banking industry and peered banks, however, showed significant levels of credit concentration as indicated by the extent of capital depletion under the various shock scenarios. On the assumption that the credit facilities of the five (5) biggest corporate obligors deteriorated from “doubtful” to “lost”, the CARs of the entire banking industry, large, medium and small banks declined from their baseline positions to 9.91, 7.22, 4.19 and 9.02 per cent, respectively.”

The report indicated that under this scenario, only five banks would be able to maintain CARs equal to or above 10.0 per cent, while the remaining 18 would re­cord less than 10.0 per cent CAR.

A breakdown of the test revealed that, after the 5-day and cumulative 30- day shocks were applied, the industry liquidity ratio (LR) declined to 12.2 and 10.4 per cent, respectively, from 50.53 per cent. Most banks’ LRs were also below the 30.0 per cent threshold after the two scenarios.

Furthermore, three banks recorded a negative LR, fol­lowing a cumulative 30-day shock. Two of these banks were among the categorised “large banks”

Meanwhile, the report showed that the volume and value of NIBSS Electronic Funds Transfer (NEFT) increased to 16,115,171 and N7,569.17 billion at end-December 2013, from 3,918,838 and N6,738.14 billion at end- June 2013, reflecting increases of 15.78 per cent and 12.33 per cent in volume and value.

Also, the electronic card transactions rose to N1, 764.11 billion in the sec­ond half of 2013, from N1, 416.10 billion in the first half of 2013, reflect­ing an increase of 20.04 per cent, while the volume increased to 176,413,492 at end- December 2013, from 146,961,511 at end-June 2013.

Meanwhile CBN’s finan­cial stability report showed that automated teller ma­chines (ATMs) remained the dominant channel of electronic payments as they accounted for 89.92 per cent, followed by mobile payments with 5.55 per cent and PoS terminals with 3.51 per cent. The Internet as a payment channel (e-commerce) is yet to be fully embraced by the banking public as it remained the least patronised but ac­counted for only 1.02 per cent of the total. In value terms, ATMs accounted for 87.44 per cent; PoS, 5.88 per cent; mobile payments 5.17 per cent; while the In­ternet accounted for 1.51 per cent.


Source : SunOnline

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