By Kelechi Mgboji
Assistant Business Editor
Concerned about the level of loan loss reserves being taken by banks, the Central Bank of Nigeria (CBN) last week mandated the lenders to immediately double their general provisions on performing loans to 2 per cent, from 1 per cent previously.
This development sent the shares of First Bank, Skye Bank and Ecobank tumbling, as investors weigh in the negative implications for dividend payouts and capital ratios for the lenders, particularly these three whose capital adequacy ratios are weakened by the new guideline.
CAR negative for FBNH, Skye, Ecobank
Highlighting the development in an emailed note to TheNiche, Renaissance Capital, a Lagos based research firm, noted that this development is going to exert the most strain on the CAR of the FBN Holdings, Skye Bank and Ecobank Nigeria.
“We see this regulation potentially putting the most strain on the CAR of FBN Holdings, Skye Bank and Ecobank Nigeria,” RenCap warns investors.
They noted that as at the third quarter (Q3) 2015, these banks reported CAR of 16.2 percent, 17.3per cent and 16.9 per cent, respectively as against their current 15 percent regulatory minimum requirement, and the 16 percent minimum requirement for systemically important banks (SIB).
“The higher CAR for SIBs takes effect from 1 July 2016. We see another potential capital stress point for the Nigerian banks in the CBN’s updated capital computation template, which is yet to take effect but has tighter restrictions on credit mitigants and risk weights.
“While we still expect these banks to approach the market for capital, should they struggle to execute a successful raise, we think the CBN would be lenient, given the testing market environment,” the analysts stated.
Implication of 2% general provisions doubling
Explaining the implication, the RenCap analysts stated that the general provision to 2 percent increases the likelihood of the regulatory risk reserve (RRR) exceeding IFRS provisions, presenting downside risks to dividend payouts and capital adequacy ratio (CAR).
However, “It is important to state explicitly that a doubling of the general provisioning requirements has no implication on profit and loss financial statements, but on equity, capital adequacy and distributable retained earnings for dividends,” said RenCap analysts led by Adesoji Solanke and Olamipo Ogunsanya.
According to them, new central bank rules on loss provision may hurt dividend payouts as lenders prepare to adopt stricter international requirements.
Investors react as FBN, Skye Bank, Ecobank shares tumble
For a market where capital appreciation has been seriously hampered by sustained losses, dividend payout holds a consolation for battered investors which is why the investors are now losing sleep over the new development.
Consequently, banking equities including FBN Holdings, Skye Bank and Ecobank have witnessed massive sell offs in recent times, indicating that investors are dumping their holdings at lower prices.
The index of top 10 banking stocks shed 3.39 per cent on Monday, November 16 compared to more than 18 per cent decline in NSE benchmark index.
Widespreading anxiety among bargain hunting investors on banking sector equities resulted in further losses in the sector between Monday and Wednesday, November 18.
Banking stocks often dictate market direction, and a 0.18 per cent depreciation of the sectoral banking index to 294.76 basis points on Tuesday, November 17 accounted for significant losses on a day NSE market capitalisation of the listed equities shed N62billion to close at N9.746 trillion.
The NSE All-Share Index which measures performance of the market fell by 181.53 basis points or 0.63 per cent to close at 28,351.28 basis points.
The market had shed 1.07 per cent on Monday to 28,532 points, a level last reached in August.
It further depreciated by 0.64 per cent on Tuesday, November 17 to close at 28,351.28 basis points, compared with the 1.07 per cent depreciation on Monday.
Its year-to-date (YTD) performance currently stands at minus 18.20 per cent.
Apart from the NSE Banking Index, all other four sectoral indexes also declined with the NSE Consumer Goods Index the most hit, falling sharply by 1.28 per cent to close at 707.05 basis points, down from 716.25 basis points while NSE Oil and Gas Index followed, down by 0.88 per cent to 342.93 basis points.