Following the drop in the price of crude oil and other commodities, experts have warned financial regulators especially the apex bank to be vigilante against the build-up of systemic risk in the financial system. They specifically warned against the danger posed by currency mismatches on the balance sheets of deposit money banks, most of which borrowed money in foreign currencies when the going was good. Several banks prior to the recent collapse in the price of commodities borrowed from multilateral organisations and commercial banks in dollars and issued bonds denominated in dollars and euros. With the drop in crude oil price leading to a significant devaluation of the Naira, repaying such loans will weigh heavily on the profit of these banks. “We are going to see depreciation in asset quality of these banks. They either have to renegotiate these instruments or write them off; which will impact their balance sheet negatively” says a Management staffer of Zenith Bank, who pleaded anonymity.
The fate of the banks, according to him, is worsened by the fact that most of these borrowed money were lent to ‘oilmen’ who have since been without much business since the incumbent government came on board. With the strong anti-corruption stance of President Muhammadu Buhari, he said many of those who engaged in importation of refined petroleum products and other sundry businesses such as rice importation, will find it difficult repaying loans extended to them within the stipulated time. “For now it seems only NNPC is importing fuel and the investments made by these oil importers will go sour,” he says. The CBN governor had earlier stated that payment of subsidy on fuel importation and foreign exchange differential on bank loans granted to marketers by the federal government will be ended. The government is also working towards making the NNPC to be the sole importer of refined petroleum products and mandated it to fix the refineries.
The banks are also threatened by the prospect of United States Federal Reserve raising interest rate soon which could further send the naira spiralling downwards as capital outflow will increase. The devalued naira will make it worsen the currency mismatches, as banks will find it difficult paying back foreign debts owed. “Banks that owe foreign debt should be prepared for the worst as the naira is currently overvalued. If the crude oil price does not improve, the CBN may be forced to devalue which will make the banks foreign indebtedness larger,” says Martins Uwa, a financial consultant.For Femi Awoyemi, CEO of Proshare Nigeria, the banks could have managed the situation with sound currency risk management but thinks it is almost impossible to manage the exposure given the devalued naira exchange rate (N199 to $1) and the illiquidity in the system caused by the implementation of the Treasury Single Account (TSA). Most analysts however believe the banks will be able to weather the storm; most of which will push the fallout of any crisis onto shareholders by withholding dividends payments. If the banks are distressed, they warn, the stock market will suffer as banks makes up a significant share of market capitalisation.
Recently, the news which made rounds that Diamond Bank and eight other banks lacked sufficient capital to remain in business was quickly debunked by the Central Bank of Nigeria(CBN) as well as financial experts who point to the third quarter result of the bank which showed strong performance. The apex bank denounced the rumours, stating thatno bank is in distress. However, there would be no pain in being extra vigilant.
By Osaze Omoragbon