Deposit money banks in the country may be in for a tough time following Central Bank of Nigeria (CBN’s) planned introduction of fresh capital rules in the second quarter of the year.
This is because, the new rule, called, the Basel 111 or International Financial Reporting Standards (IFRS 9), though desirable for international competitiveness and engendering confidence in the sector, is seen by some operators as a big threat with many banks currently weighed down by bad loans, occasioned by economic downturn.
Some fear that the modeling, which is like a new methodology of assessing loan loss provisioning, may become an Archile’s hill for some banks with the resultant polarisation of the sector between those that can afford the wherewithal for the technological know-how and those that cannot.
“The new rule would mean a significant change to what they have been doing before, and for some, it may mean changing their accounting software used in deriving the reporting figure or preparing their accounts. The result could be emergence of the Big Five versus the rest Banks,” says an analyst at the weekend.
In fact, analysts at Investment One Research believe that the new requirements could trigger mergers in the industry. “We believe that this new requirement could lead to further mergers and acquisitions in the medium term,” they said.
The IFRS 9 would mean that most banks might be reporting on it for the first time. Specifically, it has proposed that banks adopt a radical change in their loan loss provisioning. Previously banks were allowed to adopt the incurred loss model, which is based on incurred bad loans but under new rule, banks are expected to adopt expected loss model when making provision for non-performing loans, meaning that expected loss is futuristic, implying a kind of provision based on modeling which most banks are not used to.
CBN, it was further gathered, plans to apply the leverage ratio to supplement existing capital ratios for lenders, as well as additional loss-absorbency requirements for domestic-systemically important banks.
The new rule is an international regulatory framework consisting of agreed set of measures developed by the Basel Committee on Banking Supervision in response to the financial crisis of 2007-09, aimed at strengthening regulation, supervision and risk management of banks.
It is also an order to promote stability in the international financial system, with the purpose of reducing the ability of banks to damage the economy by taking on excess risk.
The new capital requirement seeks to more specifically define what constitutes the various regulatory capital classes and enhance liquidity requirements, strengthen corporate governance and improve risk disclosure, and also improve transparency and disclosure with regulations that build upon the BASEL II accords, which all Nigerian banks are currently in compliance with.
The apex bank migrated banks to a new accounting standard known as IFRS 9 in January 2018 to improve disclosure by forcing lenders to provide for existing losses, as well as those that might occur.
The transition led to most banks shedding as much as 200 basis points off their equities and some tier II banks are still finding it difficult to raise their capital adequacy requirements above the regulatory benchmark and also led to at least one takeover deal – Diamond Bank Plc by Access Bank Plc.
The new requirements, according to the CBN, will be stricter in terms of what funding qualifies as capital and will also require lenders to create “capital conservation” and “counter-cyclical” buffers.
The rule also seeks to protect the nation’s banks “against shocks emanating locally and from abroad” by increasing the level of regulatory capital and the quality of the assets, the CBN said.
CBN says it is aligning itself with a global accord known as Basel III, three years after a contraction in Nigeria’s economy spurred authorities to delay the implementation of tougher capital rules. It also comes after policy makers in 2013 spurned some requirements drawn up by the Basel Committee on Banking Supervision.
Sunday investigations further showed that the current anxiety is as a result of knowledge gap in the implementation of the International Financial Reporting Standard, (IFRS) generally; adding that implementation of the IFRS 9 will change the balance sheet of banks.
According to an analyst, “Even in the UK, it is a big issue, and because nobody has done it before, finding expertise will be difficult in Nigeria and also within the Financial Reporting Council, (FRC), agency that is supposed to ensure full compliance.”
Specifically, Nigerian authorities migrated banks to a new accounting standard known as IFRS 9 last year to improve disclosure by forcing lenders to provide for existing losses as well as those that might occur in the future. While the average capital-adequacy ratio for the industry rose to 12.1 percent in June from 10.2 percent at the end of 2017, some banks said the transition shaved as much as 200 basis points off their capital bases.
While some lenders are struggling to contend with non-performing loans equal to 12.5 percent of total credit, an improvement from the almost 15 per cent in 2017, many small- to medium-sized banks are battling to raise capital, resulting in the current discussions in the industry over survival strategies.
Managing Director, Heritage Bank, Mr Ifie Sekibo, said although the implementation will be tough at the beginning, but things will shape up after a while.
“It will affect us at the initial time when we are taking the heat. But it is a zero-sum game for me. Down the line after three to four years, it comes down. Because, if today you believe borrower is not going to pay and the economy improves and he pays tomorrow, it goes back to your profit.
“So, initially we are all going to feel a jolt. There will be a depression in some of our earnings because we are taking more heat. But it speaks to the strength of the bank. And that strength of the bank is what the customers need to be comfortable about that. After all, you have a bank that is still able to carry your liabilities”.
Analysts at Renaissance Capital (Rencap) are of the opinion that 2019 will be a challenging year for the Nigerian banks and the implementation of these rules will make things worse for the banks in the year.
“We expect top-line earnings growth will remain weak across the board, and compounding this we see limited scope for further asset quality improvements. With 2019 being an election year, we expect no meaningful activity in the Nigerian banking sector until 2H19 at the earliest. We would welcome a change in CBN governor, but that would present some uncertainty, the analysts said.
Speaking of IFRS 9, the analysts said the implementation which began on 1 January 2018 has led to lower net asset values (NAVs) for the Nigerian banks.
“During the year, the CBN introduced a four-year transitory period for the full implementation of IFRS 9 in the computation of capital ratios. Simply put, in computing capital ratios, the banks can now amortise the impact on retained earnings over a four-year period. As stipulated by the CBN, 40 per cent of the day-one impact will be taken in year one, while the remaining 60 per cent will be amortised over the next three years, on a straight-line basis. The IFRS 9 impact on NAVs also supported the uplift in RoEs,” The analysts said.