Last month, a leading investment banking firm, Renaissance Capital (RenCap), released a report on Nigerian banks titled “Nigerian banks navigating through the stormy sea.” This report explores the ripple effect of the current economic situation on Nigerian banks following the sharp decline in the price of oil since 2014, the weakening Naira and expectations of possible devaluation. The report also gave more insight on what would happen to Nigerian banks if the Naira is devalued.
According to the report, here is the threefold impact of devaluing the Naira on Nigerian banks:
Capital
According to the reports, banks with a higher proportion of forex Risk Weighted Assets (RWA), such as Guaranty Trust Bank (GTB), would see a bigger drop in Capital Adequacy Ratio (CAR). This is because a naira devaluation would inflate RWA. In the event of this, the First Bank of Nigeria Holding (FBNH), Ecobank Nigeria and Skye would be quickest to breach the minimum CAR requirements and feel the pressure to raise capital. From RenCap’s assumptions, Fidelity Bank and Stanbic IBTC are in the best position from a capital perspective, with capital buffers of 4 percent and 3 percent in the event of a 50 percent naira devaluation. The most sensitive banks to a weaker naira are GTBank, FCMB and Zenith because they do not have sufficient FX tier 2 capital buffers to shield them from the impact of a devaluation.