MPC Members Worry Over Banks’ Weakening Indicators

• CAR Falls To 12%
• NPL Rises To 15.18%
• Liquidity Ratio Registers Decline

By Nse Anthony-Uko, with agency reports
(Sundiata Finance) – Monetary Policy Committee (MPC) members have expressed concern over the weakening banking sector resilience as indicated in lower performance ratios, BusinessDay reports.
The MPC members in their personal comments highlighted that Deposit Money Banks’ Capital Adequacy Ratio (CAR) grew weaker, falling to 12.81 per cent in April, from 13.6 per cent in February, which is below the prudential requirement of 15 per cent for banks with international authorisation. Furthermore, the Non-Performing Loans (NPLs) of the sector have also risen to 15.18 per cent from 13.59 per cent in February 2017, which is far above the prudential limit of 5 per cent. The liquidity ratio has also registered a decline from 46.61 per cent to 44.60 per cent. When compared with the prudential limits of 30 per cent, it can be seen that the interbank market has not been active, reflecting the fact that banks have not been trading among themselves, which is not a desirable situation, according to Balami Dahiru Hassan, a member of the MPC. In his personal statement at the last MPC, Hassan noted that some of the banks were making use of the Standard Lending Facility (SLF), which under normal circumstances was meant for weaker banks. “This needs to be discouraged.
Even with the bad ratios, banks are still making profit. It should be noted that the three previous outlier banks have now become four. If adjustments are made for foreign exchange, the banks will be making lower levels of profit,” he said. Adelabu Adebayo, CBN deputy governor, operations, sees the evolving fragility of the banking system as one of the risk factors confronting the strengthening of macroeconomic stability. According to Adebayo, the shocks in the banking sector are as a result of the negative growth in output and the depreciation of the naira. he contraction in output has reduced profitability of firms and business outfits, leading to escalation of NPLs in the banking industry while depreciation of the naira, on the other hand, has reduced the asset base of the banking sector in real term, thereby constraining their intermediation capacity. “The banking industry has been reacting to this adverse developments through a gradual cut in credit, particularly, credit to the private sector.
This development is not expected to show improvement within the near term given that the shocks appear to be permanent in nature,” Adebayo said in his personal MPC statement. Barau Suleiman, CBN deputy director, corporate services, said the banking sector had been highly challenged by the adverse developments in both the financial and real sectors of the economy. The contraction in real GDP contributed substantially to elevated NPLs in the industry, which had, invariably, elicited cutback in the level of credit exposure by the banks since the latter half of 2016. “From the financial sector development, the depreciation of the domestic currency has reduced the value of banking asset in real terms. Recent statistics showed that total banking assets denominated in US dollar reduced by 27.4 per cent in 2016 compared to the level in 2015 on account of currency depreciation of about 55 per cent during the period. “The reduction in asset in real term coupled with the elevated NPLs would therefore weigh on the capacity of the banks to support the recovery process,” Suleiman said. “I would like to emphasise, as contained in my last statement, the need to provide necessary support that could repair the balance sheet of the banks in order to help them resume credit delivery to the critical sectors,” Barau said.

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