CBN Stress Test Reveals Banks Capital Adequacy Fall Below Requirement

A stress test conducted by the Central Bank of Nigeria (CBN) on Deposit Money Banks (DMB) has revealed that the capital adequacy ratio (CAR) of banks with international authorisation fell below the minimum regulatory requirement.

The apex bank made the revelation in its quarterly economic report which was analysed by THE WHISTLER.

The capital adequacy position of a bank measures its capital strength and risk profile.

The CBN Guideline on Regulatory Capital as released in 2021 mandated banks to maintain a prudential Capital Adequacy Ratio of 10 per cent for National and Regional Banks.

The CBN said all banks and banking groups with international authorisation will maintain a 15 per cent regulatory Capital Adequacy Ratio.

The CBN said, “The banking system Capital Adequacy Ratio (CAR) fell by 3.0 percentage points to 11.2 per cent, relative to the 14.2 per cent recorded in the preceding quarter. The ratio was above the 10.0 per cent benchmark for banks with national/regional authorisation, but below the 15.0 per cent threshold for banks with international authorisation.

“The development reflected a decline in the banks’ total qualifying capital relative to the increase in risk weighted assets due to the depreciation of the naira exchange rate, as a result of the adoption of a market determined exchange rate policy by the Bank.”

The CBN, on June 14, 2023, adopted a managed float of the exchange rate, which resulted in the naira’s depreciation from around N449.51 per dollar to over N850 at the official window.

Banks suffered huge foreign exchange losses from the revaluation of the naira-denominated assets.

The naira depreciation also affected the value of the N50bn, N25bn and N10bn capital requirement of international banks, national banks, and regional banks, respectively.

The CBN Governor Olayemi Cardoso, at the last annual dinner of the Chartered Institute of Bankers of Nigeria said the apex bank will introduce new capital requirements for banks.

Cardoso stated that a stress test conducted on the banking industry indicated strength under mild to moderate scenarios of sustained economic and financial stress.

The document analysed by THE WHISTLER showed that banks’ asset quality, measured by the ratio of Non-Performing Loans (NPLs) fell marginally by 0.4 percentage point to 4.1 per cent in the second quarter of 2023 from 4.5 per cent in the previous quarter.

The CBN said it reflects sustained improvement in loan recoveries by banks as the ratio was below the prudential benchmark of 5.0 per cent.

The Industry Liquidity Ratio (LR) rose significantly by 10.9 percentage points to 62.2 per cent in the review quarter, compared with 51.4 per cent, recorded in the first quarter of 2023.

The LR was above the minimum regulatory benchmark of 30.0 per cent, showing the ability of the banks to meet their obligations.