Moody’s: Weak Capital Buffers Reveal Tier 2 Banks’ Vulnerability

• Nigerian businesses lose $25bn annually to power outages

One of the leading global rating agencies, Moody’s Investor Service, yesterday pointed out that the smaller banks in Nigeria, commonly known as the tier 2 banks, are operating with weaker capital buffers, which indicate vulnerability of these banks.

This is coming as World Bank Group (WBG) report has disclosed that Nigerian businesses experience an average of 239 hours power outages monthly, compelling them to resort to alternative electricity sources, which in turn results in economic losses in excess of $25 billion annually.

The rating agency, however, noted that capital buffers are strong for the bigger banks in the country.
Moody’s stated this in a 35-page report on its 2019 outlook for African banks.

The Central Bank of Nigeria (CBN) requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15 per cent, while banks without international subsidiaries maintain CAR of 10 per cent.
But the minimum requirement for the systemically important banks is 16 per cent.

The apex bank had in its recently released half year economic report, revealed that as of June 2018, three commercial banks did not have the prescribed minimum liquidity ratio of 30 per cent.

The CBN had also warned commercial banks to guard against emerging risks in the financial system, saying the sector’s resilience was receding.

The Deputy Governor, Corporate Service Department of the bank, Mr. Edward Adamu, had stated this in a statement at the September 2018 Monetary Policy Committee (MPC) meeting.

He had also noted the rising non-performing loans (NPLs) ratio in the sector, which he said was driven essentially by oil sector exposures. Equally of concern to Adamu was the decline in capital market indicators.

Continuing, Moody’s in the report noted that the risks to the operating environment relate to the rising US interest rates leading to capital outflows across emerging markets, in conjunction with rising government debt and currency depreciation, could significantly harm African banks’ loan quality and access to foreign currency.

The report, however, stated that Nigeria has a stable outlook because of the improved foreign-currency liquidity and rising loan quality.

Furthermore, it explained that higher oil prices and partial liberalisation of the foreign-exchange market have eased pressures on, “unhedged borrowers and normalised foreign-currency liquidity.”

It, however, pointed out that asset risks nonetheless remain high as Nigerian banks continue to tackle legacy issues, “similarly, earnings remain under pressure as loss-loss provisions remain elevated.”

For banks in the continent generally, the report predicted that the financial institutions would show financial resilience.

It projected a mild recovery in economic growth, driven by relatively stable commodity prices, robust domestic demand and domestic policy adjustments.

It stated, “Stricter regulation and better supervision will also help address legacy governance issues and support banks’ financial stability. We view Egyptian, Moroccan and Mauritius rated banks as most resilient.

“Banks’ credit profiles remain sensitive to such developments, including through inter-linkages with their sovereigns, particularly given their large holdings of government securities.

“Many sovereigns came out of the recent commodity slump with weakened fiscal positions. Tunisian, Tanzanian and DRC banks are most at risk, and to a lesser extent South African, Nigerian and Angolan banks.

“For 2019, we expect most rated banks to maintain stable profitability, build up their capital buffers and retain ample local currency funding.

“Asset risks will remain high, while we also expect some renewed tightening of foreign currency liquidity; banks are, however, in a better position to withstand pressures following efforts to reduce foreign-currency lending.”

For Moody’s rated countries, the report projected Gross Domestic Product (GDP) growth of 3.8 per cent in 2019, up from 3.1 per cent in 2018 and 2.7 per cent in 2017, stating that growth would be driven by relatively stable oil and commodity prices, stronger agricultural output, domestic policy adjustments and strong domestic demand.

It added, “For the continent’s two biggest economies -Nigeria and South Africa, growth will be more subdued at 2.3 per cent and 1.3 per cent respectively, but higher than 2016-2018.

“More stable oil prices will drive economic acceleration in Nigeria and improved business and investor confidence will spur improvement in South Africa.

“The new macro-prudential limits set in Egypt; implementation of Basel II/III capital standards in the West African Economic and Monetary Union (WAEMU) and the adoption of IFRS 9 accounting standards across most African countries.

“These initiatives will also help address legacy corporate governance issues and patchy credit underwriting that were behind the recent failure of banks in Angola and of second-tier banks in Kenya, Tanzania and Nigeria.

“In this environment we project a slight acceleration in loan growth to around 10 per cent.”

It also stated that political uncertainty and risk of social unrest are an ever-present challenge for Africa, citing South Africa, Tanzania, and Nigeria as some of the countries that face such challenges, which could weaken investor and consumer confidence.

“External shocks such as falling commodity prices, drought, or an escalation of global trade wars, could hurt African corporate and their ability to repay debt,” it warned.

Nigerian Businesses Lose $25bn Annually to Power Outage

Meanwhile, a World Bank Group (WBG) report has disclosed that Nigerian businesses experience an average of 239 hours power outages monthly, compelling them to resort to alternative electricity sources, which in turn results in economic losses in excess of $25 billion annually.

The document, obtained by THISDAY was part of the Power Sector Recovery Programme (PSRP), which the World Bank developed in 2017 with the federal government to revive Nigeria’s ailing power sector privatised in 2013.

It explained that poor electricity supply in the country also leads to payment apathy by consumers.

According to the report, with the high power outages, Nigerian firms frequently resort to alternative electricity sources which in turn results to economic losses in excess of $25 billion annually.

Titled, ‘Program-for-Results Information Document (PID) – concept stage’ under the Power Sector Recovery Performance Based Loan, the report stated: “Electricity service delivery is poor with serious repercussions for Nigerian economy and citizens.

“Average annual per capita electricity consumption of Nigeria (147 kWh) is a fifth of the average low middle-income country consumption (736 kWh) and a twentieth of the global average consumption (3,298 kWh).

“The unreliable power supply results in lack of consumers’ willingness to pay, drives industry to pursue off-grid alternatives and causes economic losses in excess of US$25 billion annually (the PSRP estimate),” it said.

It further explained: “Nigerian businesses experience an average of 239 hours of power outages per month, accounting for nearly seven per cent of lost sales. Most private enterprises are forced to resort to self-generation at a high cost to themselves and the economy (about US$0.20 – 0.30 per kWh as compared to the current grid based tariff of US$0.16 per kWh).”

The report equally noted that an investment climate assessment conducted in Nigeria indicated that a good number of Nigerian business owners considered lack of electricity as being the biggest obstacle to doing business in the country.

According to it, the steep decline in power output in 2016 from the peak of over 5,000 megawatts (MW) in March 2016 to less than 3,500MW in early 2017 contributed to the contraction of economic activity by an estimated 1.5 per cent in 2016.

The document also stated that the lack of consistently cost-reflective tariffs and low collections have been the main sources of the poor financial viability of electricity distribution companies (Discos), which it noted, have accumulated huge revenue deficits in the market.

It said, “From November 2013 to December 2014, the accumulated financial deficit was NGN213 billion (US$678 million, equivalent). An additional deficit of about NGN473 billion (US$1.5 billion, equivalent) was accumulated from January 2015 to December 2016.

“End-user tariffs have fallen below cost recovery due to their inadequate adjustment for inflation, exchange rate, and actual amount of energy delivered.”