Banks with International Authorization Show Capital Adequacy Ratio Below Regulatory Threshold – Banking Regulator

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According to the second-quarter report on financial soundness indicators released by the banking regulator, some banks with international authorization are reported to have a capital adequacy ratio below the regulatory threshold. Despite the banking industry’s overall resilience, the report highlights a decline in the capital adequacy ratio for banks with international authorization, citing factors such as the depreciation of the naira exchange rate.

Key Points:

  • Capital Adequacy Ratio Trends:
    • The banking industry’s capital adequacy ratio declined by 3.0 percentage points to 11.2 percent in the review quarter, compared to the 14.2 percent recorded in the preceding quarter. While the ratio was above the 10.0 percent benchmark for banks with national/regional authorization, it fell below the 15.0 percent threshold for banks with international authorization.
  • Reasons for Decline:
    • The report attributes the decline in the capital adequacy ratio to a reduction in banks’ total qualifying capital relative to an increase in risk-weighted assets. This was influenced by the depreciation of the naira exchange rate, resulting from the adoption of a market-determined exchange rate policy by the Central Bank.
  • Asset Quality and Non-Performing Loans (NPLs):
    • The asset quality of banks, measured by the ratio of non-performing loans, marginally fell by 0.4 percentage points to 4.1 percent in the second quarter of 2023. This decline is attributed to sustained improvement in loan recoveries by banks. The NPL ratio remained below the prudential benchmark of 5.0 percent.
  • Liquidity Ratio Increase:
    • The industry liquidity ratio witnessed a significant rise of 10.9 percentage points to 62.2 percent in the review quarter, compared with 51.4 percent in the preceding quarter. The liquidity ratio surpassed the minimum regulatory benchmark of 30.0 percent, indicating the banks’ ability to meet their obligations.
  • Exchange Rate Policy Impact:
    • The report points out that the depreciation of the naira exchange rate, resulting from the adoption of a market-determined exchange rate policy, contributed to the decline in the capital adequacy ratio for banks with international authorization.
  • Regulatory Thresholds and Compliance:
    • While the banking industry’s overall financial soundness indicators were within regulatory thresholds, the report specifically highlights the challenges faced by banks with international authorization in maintaining the required capital adequacy ratio.

Conclusion: The disclosure of some banks with international authorization having a capital adequacy ratio below the regulatory threshold raises concerns about the impact of the depreciation of the naira exchange rate on the banking sector. The report emphasizes the need for banks to navigate challenges associated with fluctuating exchange rates and maintain compliance with regulatory benchmarks to ensure financial stability.

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