Nigerian Banks Battling With Forex Liquidity – Moody’s

• Nigerian Banks Battling With Forex Liquidity 

A global rating body, Moody’s, has said many banks in Nigeria are struggling to handle diminishing foreign currency liquidity.

The rating body noted that the reduced foreign currency deposits would increase the monetary institutions’ funding costs.

“The reduction in foreign currency deposits is credit negative for Nigerian banks because it lessens banks’ already-weakened foreign currency liquidity buffers,” said Moody’s Vice President and Banking Analyst, Akintunde Majekodunmi.

In February, the Central Bank of Nigeria released data showing that foreign-currency deposits declined by 14.2 per cent to $14.5b in December 2016 from $16.9b in June 2016.

According to Moody’s, the shrunk deposits reduce the banks’ foreign currency liquidity buffers, which it said were already “stressed” in 2016.

“The ratio of FX liquid assets/FX total assets averaged 24 per cent as of June 2016 for the system’s largest five banks: First Bank of Nigeria Limited (B2 negative, b3); Zenith Bank Plc (B1 stable, b1); Access Bank Plc (B1 stable, b2); Guaranty Trust Bank Plc (B1 stable, b1); and United Bank for Africa Plc,” a statement by Moody’s made available to our correspondent said.

It further noted that as foreign currency deposits decreased, the country’s banks would have to increase their reliance on market funds, which are more expensive and confidence-sensitive than deposits.

Additionally, the rating agency stated that banks were losing cheaper deposits because foreign currency deposits are exempt from Nigeria’s high cash reserve requirement of 22.5 per cent.

“All these factors will put upward pressure on banks’ funding costs, adversely affecting their interest margins. Among Moody’s rated banks, Sterling Bank Plc (B2 stable, b3) and First Bank of Nigeria Limited are likely to be more affected because their outstanding Treasury Single Account obligations as of August 2016 and/or upcoming dollar liabilities were greater than FX liquid assets.

“Guaranty Trust Bank Plc, whose FX-loans/FX-deposit ratios was 162 per cent as of June 2016, and Access Bank Plc whose ratio was 133 per cent as of June 2016, have greater reliance on market funding but both have sufficient FX liquid assets to meet their maturing obligations this year,” the agency added.

Speaking further on the issue, Majekodunmi said, “We believe the majority of the withdrawals are related to Treasury Single Account remittances, which require Federal Government agencies to keep excess cash in a single account at the central bank rather than at banks. Additionally, withdrawals of foreign currency deposits are attributable to depositors transferring FX balances abroad amid dampened confidence and uncertainty regarding Nigeria’s FX environment.”