CBN’s Stress Test Reveals Nigerian Banks Vulnerability to Economic Headwinds

November 18, 2020/Proshare

By FDC Research

The CBN has revealed that based on the stress test conducted on twenty-seven (27) financial institutions, most banks are vulnerable to economic headwinds. However, the banking industry’s solvency and liquidity position remain robust.

The apex bank in its economic report for the first half of 2020 stated that a contraction in GDP in Q3 could lead to a fall in capital adequacy ratio (CAR) from an average of 15% to 11.2%. In a worst-case scenario of a further contraction in GDP in Q4’2020 and Q1’2021, banks’ CAR could fall as low as 8.3%.

According to the report, the stress test was conducted in the context of a sharp drop in oil prices, reduced global demand for Nigeria’s oil products, a decline in government revenue, an unfavourable current-account position and a fall in real GDP. However, the central bank noted that the severity of the simulated contraction could be contained by a combination of fiscal and monetary interventions.

The CBN also noted that with CAR and liquidity ratio levels above the regulatory minimum, Nigerian banks are generally healthy. The ratio of non-performing loans (NPLs) to gross loans decreased to 6.4% in the first quarter of 2020, from 10.8% a year earlier, partly owing to debt restructuring. Any renewed pressure on asset quality is likely to spring from the central bank’s controversial policies aimed at expanding credit.

A minimum loan-to-deposit (LDR) ratio of 65% is especially distortive, compelling banks to extend loans to the private sector or face a forfeit. Credit extension has helped to reduce the NPL ratio, but as the central bank has warned, an economic contraction could lead to a deterioration of banks’ asset quality. 

Credits

The post CBN’s stress test reveals banks vulnerability first appeared in Volume 10, Issue 16 of the FDC Monthly Economic Update released on Tuesday, November 17, 2020.

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