Two new generation banks are technically bankrupt, Ripples has learnt.
Investigations showed that the Capital Adequacy Ratios (CARs) of these two commercial banks fell below regulatory capital requirement of 10 per cent, after the result of a stress test conducted by the Central Bank of Nigeria (CBN).
The solvency stress test, contained in the Financial Stability Report, released on Wednesday and signed by CBN Governor, Godwin Emefiele, classified lenders into three groups namely: large banks, those with assets greater than or equal to N1 trillion; medium banks with assets greater than or equal to N500 billion but less than N1trillion and small banks with assets of less than N500 billion.
The CAR is a ratio of bank’s assets to its risks and is 10 per cent for national bank, 15per cent for banks with international subsidiaries and 16 per cent for systematically Important Banks (SIBs).
The test result showed that one of the affected banks had CAR of 1.29 per cent before the test, and while two banks had 0.78 per cent and 8.2 per cent after the test, against required 10 percent requirement.
Besides, the stress test captured the nature of individual bank’s balance sheet and macro-prudential concerns using the bottom-up and top-down approaches.
The exercise covered the 23 commercial and merchant banks using the credit, liquidity, interest, foreign exchange rates and foreign exchange trading risks elements.
The report, which measured the lenders’ positions as at December last year, revealed that overall, there was high risk through unsecured interbank exposure as one bank’s CAR was below the benchmark before the shock while two banks failed to meet the CAR benchmark after the shock.
The result of the test also revealed that after a one-day run, the liquidity ratio for the industry declined to 33.4 per cent from the 48.57 per cent pre-shock position and to 10.24 per cent after a cumulative 30-day run.
A five-day and cumulative 30-day run on the banking industry will lead to a liquidity shortfall of N1.79 trillion and N1.93 trillion, respectively.
The test further revealed that 17 and 20 banks would record liquidity ratios below the potential threshold of 30 per cent, following the five-day and cumulative 30-day runs, respectively.
There was a marginal decline in the quality of assets in the banking industry last December, compared with the position at end-June 2015.
The ratio of non-performing loans to gross loans increased by 0.21 percentage point to 4.86 per cent while the decline in asset quality was attributed to the unfavourable macroeconomic environment in the review period.
The banking industry and large banks’ resilience to credit risk was robust.
A simulated severe shock of a 200 per cent rise in NPLs resulted in CARs of 12.77 and 16.52per cent for banking industry and large banks, respectively, which were above the 10 per cent required regulatory minimum.
However, medium and small bank groups showed vulnerabilities to severe shocks of 200 percent rise in non-performing loans as their CARs fell to 7.16 and 6.85 per cent respectively.
Emefiele said the general decline in commodity prices, China’s efforts at rebalancing its economy and the gradual tightening in US monetary policy all combined to hamper growth in many emerging market economies, including Nigeria.
He said the key task that faced monetary authorities in Nigeria in the reporting period centered on the use of effective policy tools to ensure that the shocks arising from instability in the global economy were not fully transmitted to the domestic economy.
Deputy Governor, Financial System Stability, Joseph Nnanna, said the quality of assets in the banking sector declined marginally in the second half of 2015 compared to the position at end-June 2015.
The decline in asset quality was attributed to the unfavourable macroeconomic environment in the review period.
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