Fitch Ratings has raised concerns over the growing risks faced by Nigerian banks, citing their heavy reliance on government debt and restrictive regulatory policies imposed by the Central Bank of Nigeria (CBN). According to the agency, sovereign-related assets—including treasury bills, bonds, and unremunerated cash reserves—make up 35% of total banking sector assets and 350% of total equity, creating significant concentration risks.
In a recent webinar co-hosted by Fitch and Renaissance Capital, Tim Slater, Director for African Banks at Fitch Ratings, highlighted the challenges posed by the CBN’s Cash Reserve Ratio (CRR), which mandates banks to hold 50% of their naira deposits with the central bank without earning interest. As of December 2024, unremunerated reserves accounted for 17% of total banking sector assets, up from 12% in 2016, severely limiting banks’ ability to lend and generate profits.
Slater noted that while the official CRR was increased from 32.5% to 50%, the actual burden on banks had previously been worse due to ad hoc debits under the former CBN leadership. These measures were often implemented to stabilize the exchange rate, forcing banks to hold reserves far beyond the official requirement. However, under the current CBN administration, the policy has become more transparent, with the actual CRR now aligning with the official rate.
Additional Regulatory Pressures
Beyond the CRR, Nigerian banks face other regulatory constraints:
– **Loan-to-Deposit Ratio (LDR):** A minimum LDR of 50% compels banks to increase lending, potentially raising non-performing loans (NPLs) if credit risks are not properly managed.
– **FX Position Limits:** Banks are barred from maintaining net long foreign currency positions, reducing their ability to benefit from FX revaluation gains during naira depreciation.
– **Windfall Tax on FX Gains:** A recently imposed tax on certain foreign exchange gains has further eroded bank profitability.
Fitch warned that these policies, while aimed at stabilizing the economy, are squeezing banks’ profitability and limiting their operational flexibility.
Forbearance and Dividend Restrictions
The CBN recently directed banks under regulatory forbearance—particularly those with unresolved oil and gas sector loans—to suspend dividend payments. Many of these loans are dollar-denominated and exceed the Single Obligor Limit (SOL), posing risks to capital adequacy.
FirstHoldCo Plc, parent company of FirstBank, acknowledged SOL breaches linked to FX loan exposures affected by the naira’s devaluation. However, the firm assured stakeholders that it is working with syndicated lenders to restructure these facilities and remains committed to dividend payments, pending regulatory approval.
Sovereign Risk Caps Bank Ratings
Slater emphasized that Nigerian banks cannot be rated above the sovereign due to their high exposure to government securities. With sovereign-related assets at 350% of total equity, any default would severely impact bank solvency. Additionally, the CBN’s 30% liquidity ratio requirement encourages banks to hold large amounts of government bonds, further tying their stability to Nigeria’s fiscal health.
Fitch’s warning comes as Nigerian banks navigate a challenging regulatory landscape, with profitability and liquidity under pressure. While recent policy adjustments have brought more predictability, the sector’s heavy reliance on government debt remains a critical vulnerability.
