Nigeria’s banking industry could face significant liquidity pressures if the Central Bank of Nigeria (CBN) enforces its directive that eight banks should refund the Nigerian National Petroleum Corporation (NNPC) funds into the Treasury Single Account (TSA), analysts at Exotix Partners, London, the world’s leading frontier markets investment bank have said. The apex bank had suspended nine banks from further dealing in foreign exchange transactions for failing to remit $2.3 billion belonging to the NNPC/NLNG to Federal Government’s coffers in line with the TSA policy.
Sources at the CBN said the lenders would not be readmitted into the forex market until they remitted all the outstanding funds and that further disciplinary actions awaited the erring banks when they finally remit the funds in full to the government’s coffers.
The CBN announced last Wednesday that it had re-admitted one of the lenders, UBA, into the foreign exchange market after the lender refunded its outstanding TSA deposits. However, commenting on the suspensions in a note they issued at the weekend, analysts at Exotix Partners, London, stated: “Given the magnitude of the figures being quoted, we think enforcement of the policy could potentially cause significant liquidity problems for some of the banks involved and that in turn could become a systemic problem for the entire sector.”
Besides, the analysts said: “The TSA repayments combined with the repayment of outstanding debt maturities will, in our view, significantly stretch banks’ dollar liquidity, especially since banks have little scope for liquidating their US$ assets (most of their US$ assets are in the form of loans to the oil & gas and power sectors, whose durations have been increased significantly in the past 18 months as part of efforts by banks to mitigate credit risk).”
They noted that although the $2.3 billion deposits represent 4.0 per cent of the industry’s total deposits, they contribute a significantly higher proportion of banks’ dollar deposits.
“We estimate the TSA deposits account for almost 25.1 per cent of banks’ total dollar deposits. With an average US$ loan-to-deposit ratio of 121.9 per cent, we believe banks’ US$ liquidity positions are already quite stretched,” the analysts stated.
According to the analysts, given that the affected banks do not have the required dollar liquidity to refund the TSA deposits and the foreign exchange market is not deep enough for the lenders to purchase the sums in the short term, the regulator would have to come up with another strategy of addressing the issue instead of trying to enforce compliance with its directive.
They suggested that a way out of the impasse would be for the CBN to sell the affected banks, dollars to cover existing (past due) trade obligations, on the understanding that the resulting liquidity would then be used to refund TSA deposits.