Lower Capital By Midsize Banks in Nigeria Will Constrain Growth – Moody’s

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Moody’s Investor Service says lower capital by Nigeria’s midsize banks will constrain their capacity to grow.

Alluding to the International Monetary Fund’s (IMF) Nigeria country report, noting that banks’ Tier 1 capital ratio had declined to 10.8% in September 2017 from 16.3% in December 2016 and 17.1% in 2013, and is now at its lowest level in the past five years, as well as the Central Bank of Nigeria’s (CBN) bank stress test results, which showed that the banking system’s capital vulnerability is driven by midsize banks’ weaker capital conditions, Banking Analyst at Moody’s Peter Mushangwe says: “Both trends are credit negative for Nigeria’s midsize banks because they limit their loss-absorption capacity against unexpected losses and will restrain their asset growth and revenue generation” .

Moody’s noted in its Sector Comment published on March 12 that the CBN’s stress test results revealed that midsize banks’ capital adequacy ratios would decline to minus 9.9% from minus 6.7% as of June 2017 should the largest five corporate exposures become substandard, one of CBN’s stress scenarios.


For large banks in that scenario, capital adequacy ratios would decline to 9.2% from 13.1%, while for small-size banks, capital adequacy ratios would decline to 12.1% from 13.5%. The stress test also showed that a 50% increase in nonperforming loans would decrease midsize banks’ capital ratio to minus 19.2% from minus 6.7%, compared with 10.2% from 13.1% for large banks and 9.1% from 13.5% for small-size banks, highlighting the higher capital erosion risk faced by Nigeria’s midsize banks.

According to Moody’s, lower capital will constrain Nigeria’s midsize banks’ capacity to grow their business, harming their revenue and delaying capital recovery through profit retention. Additionally, Nigeria’s midsize banks face greater risk of losing business to financial technology (fintech) companies because they tend to provide retail banking and payment services to individuals and small and midsize enterprises, a key entry target market for upcoming Nigerian fintechs. However, to tackle this, several banks are refocusing on the retail market segment, with digital offerings that increases impact and reduces cost-to-serve.


Nigeria’s longest-surviving indigenous bank, Wema Bank, last year launched ALAT, the country’s first truly digital bank, an end-to-end digital bank that also offers quick loans and virtual dollar cards.

Moody’s expect most banks to retain a large portion of their profits this year and build up capital cushions, although profits are expected to be small. However, this may not hold for some of the bigger banks. Zenith Bank, one of Nigeria’s largest banks reported a profit after tax of N157.145 billion on Monday, signaling what could be a surprising turn in profit for banks in the country.



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