Nigerian banks’ rising local-currency (LC) issuance is credit positive as it diversifies their funding and reduces their foreign-exchange risk, Fitch Ratings says, in a new report.
The Rating agency however stated that most ratings remain constrained by Nigeria’s operating environment and ‘B+’ sovereign rating.
The increase in LC issuance reflects banks’ reduced appetite for foreign-currency (FC) lending, their desire to diversify funding given the high Cash Reserve Requirements (CRR) on LC customer deposits and their need to issue capital securities to meet forthcoming Basel III capital requirements.
Nigerian banks are predominantly funded by customer deposits (77% in LC and 23% in FC at end-1H18). There are drawbacks to this, as FC deposits can be volatile, exposing banks to significant liquidity risks, and LC deposits are subject to a punitive CRR of 22.5%, one of the highest in the region.
The CRR forces banks to park significant reserves at the central bank. These reserves are unremunerated, and the central bank does not return excess reserves immediately. It significantly constrains banks’ ability to fund LC loan growth with LC deposits, and is a major incentive for them to diversify their funding.
Banks’ LC issuance plummeted in 2016-2017 following the oil price crash, which led to economic deterioration, weaker credit demand and rapidly worsening asset quality, particularly for oil-related loans.
Issuance recovered in 2018, when operating conditions started to improve and four banks tapped the market to bolster capital ratios or fund growth. Nigerian banks’ LC bonds totalled NGN233 billion (USD640 million) at end-January 2019.