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Nigerian Banks Face Legacy Challenges Amid Looming Recapitalization Deadline

Olusola Blessing by Olusola Blessing
November 1, 2024
in Economy, News
0
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Moody’s Ratings has highlighted that Nigerian deposit money banks are grappling with significant legacy exposures stemming from the Central Bank of Nigeria’s (CBN) COVID-19 forbearance measures. In a recent report, Moody’s cautioned that while some international banks may struggle to meet the March 2026 recapitalization deadline, the ongoing recapitalization efforts will enhance the banks’ ability to absorb loan losses and improve lending capacity.

“The recapitalization will enable the banks to better absorb loan losses and increase their lending. They will also be in a better position to implement Basel III international banking regulations,” the report stated. Although the plan is a positive step for the banking sector, concerns about the quality of banks’ loan portfolios persist.

Moody’s noted that the top five banks, which control over 80 percent of sector assets, are likely to raise the necessary capital by early next year. However, the next tier of banks, some with international operating licenses, may struggle to meet the recapitalization deadline, potentially leading to consolidation within the sector.

The recapitalization will allow banks to better manage nonperforming loans (NPLs), which stood at approximately 3.9 percent across the sector as of June 2024. Nevertheless, these banks still carry unknown quantities of legacy exposures on their balance sheets that were granted regulatory forbearance during the pandemic. While the CBN has indicated a desire to end this forbearance, the timeline remains unclear.

 

Moody’s reported that the industry-wide NPL rate has decreased from 4.8 percent in April 2024, remaining well below the CBN’s five percent maximum threshold. However, the agency expressed concerns about the weak reporting of legacy nonperforming loans, attributing this to the forbearance provided to banks and the restructuring of potentially problematic exposures that may not have been classified as nonperforming under previous CBN leadership.

Over the past 18 months, Nigerian banks have faced numerous challenges, including local currency devaluation, rising inflation, and broader macroeconomic pressures, leading to significant capital depletion. Moody’s pointed out that the inflation of foreign currency-denominated risk-weighted assets has negatively impacted the capital adequacy ratio, placing some banks, notably FCMB and Fidelity, near the critical 15 percent minimum capital adequacy requirement, raising concerns about their solvency.

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