CBN FX gateway bank may impact banks’ liquidity – Fitch


Credit rating agency, Fitch Ratings, has said that the proposed foreign currency gateway bank announced by the Central Bank of Nigeria may have a negative impact on the liquidity of Nigerian banks.

This was revealed in the latest Fitch Ratings commentary on Nigerian banks.

The apex bank Governor, Dr Olayemi Cardoso, recently disclosed plans to introduce a new foreign currency gateway bank to ease the country’s forex crisis.

In a television interview, Cardoso said the CBN was “introducing a single FCY gateway bank to centralise all correspondent banking activities, currently dominated by two major banks in the corresponding banking space.”

The gateway bank termed the CBN’s medium-term plan is aimed at solving Nigeria’s lingering forex problem by centralising all correspondent banking activities.

Commenting on the proposal, Fitch Ratings said, “The Governor of the CBN, Yemi Cardoso, also announced plans to establish a FC gateway bank with the intention of centralising correspondent banking activities, while asserting that a recent audit has determined $2.4bn of overdue FX forwards invalid. Fitch believes these measures by the CBN may negatively affect the banking sector’s FC liquidity.”

Meanwhile, due to about 70 per cent devaluation of the local currency since end-2022, according to Fitch, banking sector impaired loans are expected to increase at a faster pace than before the devaluation.

“Fitch expects the banking sector’s impaired loans (Stage 3 loans) ratio to increase at a faster pace than before the devaluation, which itself has caused already material FC-denominated problem loans (Stage 2 and Stage 3 loans; predominantly oil and gas sector loans) to have inflated relative to gross loans and core capital and accentuated credit concentration risks,” the credit rating firm said.

On the impact of the CBN circular prohibiting banks from holding net long foreign currency positions, Fitch said that it would lead to a further moderate depreciation of the naira.

“The Central Bank of Nigeria has published new circulars and made a number of statements accompanying the recent devaluation. One circular issued after the devaluation on January 31, aimed at increasing the supply of FC, prohibited banks from having net long FC positions, and set February 1 as the deadline for compliance.

“Net long FC positions have mitigated the impact of past devaluations, including the recent devaluation, on capital ratios as they result in foreign-exchange revaluation gains that cushion the impact of inflated FC-denominated risk-weighted assets.

“Without net long FC positions, banks’ capital positions are now more exposed to Fitch’s expectation of a further moderate depreciation of the naira, but total capital adequacy ratios (CAR), in most cases, will remain above regulatory minimum requirements,” the report said.

The CBN harmonised the different segments of the foreign currency market in June, leading to a significant devaluation in the naira.

The local closed last year at 899/$ at the official market.

Fitch said that the naira had undergone a second devaluation as it stood at 1,516/$ as of February 13, which was about 40 per cent devaluation.

“This exceeded Fitch Ratings expectations of a more moderate depreciation in 2024. The large devaluation is the second within a year and has converged the official exchange rate with the parallel market rate.

“The continued move away from a longstanding managed exchange rate regime is conducive to restoring capital inflows and reducing foreign-currency shortages that have weighed on economic activity in recent years.

“However, it creates short-term macroeconomic risks, such as accentuating already-high inflation (December 2023: 29 per cent year-on-year) that may weigh on economic growth, heightening loan quality and capital pressures already facing the banking sector,” it added.

The dollar was sold for 1,537/$ at the official window on Friday and at the parallel market, it exchanged 1,590/$1, a 1.57 per cent decline from 1,565/$ it closed the previous trading session.

Source: The Punch


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