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Friday, March 24, 2023

Banks Face Market Risk From N4.6trn of Dollar Loans

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Nigerian banks are exposed to foreign exchange risk arising from various currency exposures primarily with respect to the US dollar.

The total dollar loan exposure to customers by the top 5 lenders in the country Access Bank, Zenith Bank, United Bank for Africa (UBA), First Bank and Guaranty Trust Bank (GTB) was equivalent to N4.6 trillion at the end of 2020, according to data gleaned from their financial statements by MoneyCentral.

Zenith bank had the largest dollar loan book with dollar loans to customers equivalent to N1.185 trillion as at year end 2020. This was followed by FBN Holdings with N1.145 trillion, GTB N848 billion, UBA at N824 billion and Access Bank at N614 billion.

Foreign exchange risk represents exposures to changes in the values of current holdings and future cash flows denominated in other currencies.

For GTBank as at 31 December 2020, a stress test of its dollar exposure showed that if the Naira had weakened by 1.32 Naira against the Dollar with all other variables held constant, the pre-tax and post-tax profit for the year would have decreased by N1.087 billion mainly as a result of foreign exchange losses on the translation.

The 5 Nigerian banks had a record holding of N4.336 trillion of dollar deposits from customers, at the end of 2020.

Lenders try to use most of the cash to make loans to firms onshore and overseas to try and avoid a mismatch, banking sources tell MoneyCentral.

However, there were some mismatches with FBN Holdings loans, GTB and Zenith Bank’s dollar loans to customers significantly higher than the dollar deposits from customers and hence exposing them to market risk.

The Nigerian Naira has weakened from about N401 per dollar to N411 per dollar so far this year on the Investors and Exporters (I&E) foreign exchange window.

Most of the banks NGN/USD exchange rate applied in the conversion of balances as at year end 2020 was at about N400/USD1, suggesting more impact on the balance sheet from market risk by year end 2021.

The Central Bank of Nigeria’s foreign exchange reserves have also been under pressure this year and are down some $2 billion since mid-April.

The pressure on the Nigerian currency is adding urgency for the CBN to reform its foreign-exchange market and ease capital controls.

Nigeria is only attracting a fraction of dollars it could potentially get from portfolio flows, due to the somewhat opaque FX management system of the CBN, market sources tell MoneyCentral.

“Higher oil prices have failed to translate to an accretion in the CBN’s FX reserves. When combined with the pressure on the naira which is close to N500 per $1 in the black market, it means there is a huge backlog of demand for FX and that the focus on demand management by the CBN seems to be failing,” a banking source speaking anonymously told MoneyCentral.

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