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Wednesday, November 18, 2020 / 03:47AM / By FDC
Research / Header Image Credit: Austin County News Online
The CBN has revealed that based on the stress
test conducted on twenty-seven (27) financial institutions, most banks are
vulnerable to economic headwinds. However, the banking industry's solvency and
liquidity position remain robust.
The apex bank in its economic
report for the first half of 2020 stated that a contraction in GDP in Q3 could lead
to a fall in capital adequacy ratio (CAR) from an average of 15% to 11.2%. In a
worst-case scenario of a further contraction in GDP in Q4'2020 and Q1'2021,
banks' CAR could fall as low as 8.3%.
According to the report, the stress test was
conducted in the context of a sharp drop in oil prices, reduced global demand
for Nigeria's oil products, a decline in government revenue, an unfavourable
current-account position and a fall in real GDP. However, the central bank
noted that the severity of the simulated contraction could be contained by a
combination of fiscal and monetary interventions.
The CBN also noted that with CAR and
liquidity ratio levels above the regulatory minimum, Nigerian banks are
generally healthy. The ratio of non-performing loans (NPLs) to gross loans
decreased to 6.4% in the first quarter of 2020, from 10.8% a year earlier,
partly owing to debt restructuring. Any renewed pressure on asset quality is
likely to spring from the central bank's controversial policies aimed at
expanding credit.
A minimum loan-to-deposit (LDR) ratio of 65% is especially distortive, compelling banks to extend loans to the private sector or face a forfeit. Credit extension has helped to reduce the NPL ratio, but as the central bank has warned, an economic contraction could lead to a deterioration of banks' asset quality.
Credits
The post CBN's stress test reveals
banks vulnerability first appeared in Volume 10, Issue 16 of the FDC
Monthly Economic Update released on Tuesday, November 17, 2020.
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