Nigerian Banks Could Fail Survival Tests if Economy Contracts Further

Nigerian banks face the risk of falling below minimum capital buffers demanded by regulatory authorities in case the economy tightens again before year end, a stress test conducted by the Central Bank of Nigeria (CBN) showed.

A shrinking in the Gross Domestic Product (GDP) by 3.5% in the third quarter could force the capital adequacy ratio of banks to fall to an average of 11.2% from 15%, the apex bank said, just as a fourth quarter slump in the economy by 4% will potentially crash the measure lower to 9.3%.

Also Read: CBN Slashes Monetary Policy Rate to 11.5%

“The stress test was conducted within the background of a sharp fall in oil prices, reduced global demand for Nigeria’s oil products, decline in government revenue, unfavourable current-account position and a fall in GDP.

“The severity of the simulated GDP contraction may be contained by a combination of fiscal and monetary interventions,” CBN said in a report on its website.

Also Read: Nigerian Banks Unlikely to Boost Lending Despite CBN’s Biggest Policy Rate Cut in 6 Years 

The Nigerian economy, which depends on oil for over 60% of its revenue, declined by 6.1% from April to June as a government-imposed lockdown aimed at flattening the curve of Covid-19 spread battered businesses and a record oil crash narrowed the flow of crude earnings to a mere trickle.

Lenders in the country, which have overseas operations, are required to have at least 15% capital adequacy ratio, while the rest that operate only locally must have a 10% threshold, according to Bloomberg.