A recent stress test conducted by the Central Bank of Nigeria (CBN) revealed a disturbing revelation regarding the Capital Adequacy Ratio (CAR) among leading Deposit Money Banks (DMBs) with international approval.
Access Bank Plc, Fidelity Bank Plc, First City Monument Bank Limited, First Bank of Nigeria Limited, Guaranty Trust Holding Company Plc, Union Bank of Nigeria Plc, United Bank for Africa Plc, and Zenith Bank Plc are among the banks featured in the CBN’s quarterly economic report.
They were evaluated based on their capital strength and risk profile, which is an important indicator of a bank’s financial soundness.
The purpose of the stress test was to evaluate the banks’ financial health and ability to withstand bad economic conditions or shocks.
The capital adequacy ratio (CAR) was the focus of the test, which assesses the percentage of a bank’s capital to its risk-weighted assets and is used to establish the bank’s financial soundness.
The CAR is a CBN regulatory requirement that requires each bank to keep a certain level of capital in order to withstand probable losses.
According to the results of the stress test, the capital adequacy ratio of the eight banks with international authorization is lower than the CBN’s minimal regulatory requirement.
This suggests that these banks may not have enough capital to cover potential losses during difficult economic times, which could have an influence on their overall financial health.
The CBN’s disclosure that the banks’ CAR fell below the minimum regulatory standard raises concerns about their financial strength and stresses the need for suitable steps to be taken to address this issue.
It could provoke regulatory action, such as requiring impacted institutions to raise extra capital or execute financial-position-strengthening plans in order to limit any potential dangers to the banking industry and the economy.
The CBN’s 2021 guidelines required banks to maintain a prudential Capital Adequacy Ratio of 10% for National and Regional Banks, and a regulatory Capital Adequacy Ratio of 15% for banks with international authorization.
However, according to the most recent assessment, the banking system’s Capital Adequacy Ratio has fallen by 3.0 percentage points to 11.2 percent, much below the 15.0 percent level set for banks with international authorization.
The banks’ CAR fell due to a fall in total qualifying capital compared to higher risk-weighted assets as a result of the naira’s depreciation following the implementation of a market-determined exchange rate policy. This illustrates the difficulties that these institutions encounter.
The depreciation caused by the CBN’s managed float of the currency rate in June 2023 had a huge impact on banks, resulting in considerable foreign exchange losses and altering the needed capital for international, national, and regional institutions.
CBN Governor Olayemi Cardoso emphasized plans to establish new capital requirements for banks at the annual dinner of the Chartered Institute of Bankers of Nigeria.
Cardoso emphasized the industry’s resilience in mild to moderate stress situations, as demonstrated by a stress test on the banking sector.