People & Money

The Nigerian banks best placed for Basel III implementation

  • The CBN’s customised guidelines are positive for increasing capital, liquidity, reducing leverage and large exposures
  • However, there are tradeoffs; liquidity vs higher margins, solid capital vs payout and risk asset growth
  • Ahead of time, Access Bank has raised additional tier 1 capital. Given its success, other banks could follow suit

From November 2021, Nigeria Banks will begin implementing specific guidelines from Basel III, as put forward by the Central Bank of Nigeria (CBN). The guidelines were originally set to kick off in 2020, but the regulator rescheduled given the negative impact of Covid on the banking sector.

According to the CBN, the banks will undergo a parallel run for six months with a possible addition of three months, during which the new guidelines will run concurrently with existing Basel 2 guidelines. If the banks perform satisfactorily, the Basel III guidelines will then take full effect.

The key highlights of the CBN’s adopted measures include:

Fortifying capital positionsPreviously, Nigeria Banks classified as international banks and/or domestic systemically important banks (mostly tier 1) had to meet only a minimum total capital adequacy ratio of 15%, while national banks met 10%. With these new rules, there will be minimum requirements at several levels of capital, and all banks will be required to hold a capital conversation buffer of 1%, in the form of common equity capital. For systemically important banks, an additional 1% of common equity capital is required for higher loss absorbency. A summary of the major requirements is below.

In recent times the CBN has not clarified which of the banks are deemed ‘systemically important’, but we take an educated guess and include the five tier 1 banks – Access Bank, GTCO, Zenith Bank, FBNH and UBA. Including the buffers, the prospective framework will require these banks to have a common equity tier 1 ratio of 12.5% and a total capital adequacy ratio of 17%. Banks such as Fidelity Bank, FCMB and Union Bank (not covered) have international authorisation, and will be expected to comply with a minimum CET1 of 11.5% and CAR of 16%. National banks include Wema Bank (not covered), Sterling Bank (not covered) and Stanbic IBTC (the banking subsidiary), and are expected to have a CET1 of 8% and CAR of 11%.

Also Read: New CBN Special Bills A Boost to Banks’ Liquidity, Economic Activity

All the banks meet the CET1 criteria, although FBNH is the closest to its expected minimum threshold. For the second criteria, FBNH falls short with its current CAR at 16.8% vs 17% expected when the guidelines become effective. FBNH is the most exposed in terms of meeting the new capital guidelines, given its lower capital position in relation to peers.

In addition to capital requirements, the central bank will apply a cap on the maximum amount of dividends that can be paid to both common equity and additional tier 1 capital providers. The ceiling will depend on a combination of four factors: the banks’ NPL ratio, CET1 ratio (including buffers), leverage position and a composite risk rating which is solely determined by the CBN.

Controlling leverage: One of the CBN’s goals with the new guidelines is to constrain the build-up of excessive on and off-balance sheet leverage by the banks. Going forward, banks will be required to compute leverage ratios, which consider a capital measure (solely tier 1 capital) over an exposure measure (on and off-balance sheet exposures, derivatives, securities-backed transactions). The minimum for all banks would be 4%, but systemically important banks would be required to have a minimum of 5%. By our own calculations, all the banks met the expected minimum, although UBA and FBNH were dangerously close to the minimum. As a result, we expect these banks to reduce their exposure or raise tier 1 capital to provide an adequate gap to the regulatory minimum.

LiquidityThe apex bank is also introducing a liquidity coverage measure (LCR), which considers the banks’ stock of high-quality liquid assets compared to their total net cash outflows for 30 days and must be above 100%. The banks will also employ five other monitoring tools for liquidity, which include contractual maturity mismatch, concentration of funding, available unencumbered assets, LCR by significant currency and market-related monitoring tools.

Large exposures: In order to mitigate counterparty risks, the banks must have total exposures to a single counterparty or group of connected entities that do not exceed 20% or 50% of their total shareholders’ funds, respectively, unimpaired by losses. The guideline focuses more on transaction/trading counterparties, and is a supplement to the CBN’s existing guidelines on concentration risks across sectors and geographies, as well as single obligor limits.

Click here to read the full report, where Busola Jeje highlights the implications for Nigeria Banks, and identifies those best placed to cope with the transition.

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