Banks face increased pressure to maintain higher CAR

Nigerian banks may soon be faced with increased pressure to maintain higher Capital Adequacy Ratio (CAR). This is as a result of the exclusion of non-distributable regulatory reserve and other reserves in the computation of regulatory capital of banks and discount houses as announced this week by the Central Bank of Nigeria (CBN).

 

Analysts at an investment research and asset management company, Afrinvest (West) Africa said the policy would further exert pressure on the banks’ CAR.

 

“CAR requirement for Systemically Important Banks (SIBs) was raised to 16.0 per cent during the latter part of 2013, coupled with the partial adoption of BASEL II. These policies combined prompt the need for banks to bolster qualifying capital to keep CAR above the regulatory benchmark,” the analysts stated.

 

The Central Bank of Nigeria (CBN) published a circular on Wednesday, highlighting details on the exclusion of non-distributable regulatory reserves and other reserves in the computation of regulatory capital of banks and discount houses. This was established in a bid to raise the quality and loss absorbency of the banks’ capital base.

 

The regulatory risk reserves accommodates the difference between the allowance for impairment losses on loans and advances based on CBN’s prudential guidelines compared with the loss incurred model used in calculating impairment charges under the International Financial Reporting Standards (IFRSs).

 

Banks must hold a portion of their assets as either cash or marketable investments. Statutory reserves are the amount of liquid assets that firms must hold in order to remain solvent and attain partial protection against a substantial investment loss. Experts encouraged holding reserves because it reduces the risk of insurance.

 

However, financial analysts believed that statutory reserves lead banks to lose some potential profits as they are unable to invest these funds into mutual funds or other forms of high yield investments. However, holding reserves increases investor confidence that the company will be able to fulfill its commitment in a bear market. Some insurance companies hold additional capital, voluntary reserves.

 

In a flashnote made available to Nigerian Tribune, Afrinvest stated that: “The recently introduced 33.3 per cent Tier-2 ceiling of total Tier-1 capital, places a restriction on some of the Banks that intends to raise further Tier-2 capital in next 6 Months of the 2014 (H2:2014). Hence, may be forced to explore the Tier-1 capital (equity) raise option.

 

“A key benefit of these policies is the increased confidence of foreign banks in Nigerian banks, based on the stringent capital requirement. This is in tandem with global counterparts.

 

“This policy also provides a strong buffer for external shocks — In light of the Bank’s exposure to the Eurobond market, the prospects of volatility or depreciation in foreign exchange can be significantly absorbed,” the investment research company stated.

 

According to Afrinvest, a review of the Banks’ CAR as at half year (H1):2014 shows that within the Tier-1 space, Ecobank International (ETI) have the lowest at 16.0 per cent, at par with the 16.0 per cent regulatory requirement for SIBs.

 

In addition, FBN Holdings’ CAR berthed at 17.6 per cent in H1:2014, 1.6 per cent above the 16.0 per cent regulatory requirement for SIBs. This it said, necessitated the $450million Eurobond raised in July 2014. Within the Tier-2 space, Diamond recorded the lowest CAR with 17.3 per cent (FY:2013), 1.3 per cent above the 16.0 per cent regulatory requirement for SIBs.

 

“However, with the recent Eurobond ($200.0m) and on-going Rights Issue (US$312.5m) capital raising exercise, we expect a significant boost in Diamond Bank’s CAR possibly above 20.0 per cent,” stated Afrinvest.