Fitch, a credit rating agency, has announced that Nigerian banks can absorb up to US$6 billion in loan losses without violating regulatory minimum capital adequacy ratio (CAR) requirements.
This means banks are well capitalized and able to absorb loan losses.
A loan loss provision is a cash reserve that a bank sets aside to cover problem loans that are unlikely to be repaid.
CAR is a regulatory measure that helps ensure banks have enough capital to protect depositors’ money.
Last year, as part of its efforts to improve the resilience of deposit-taking banks and the Nigerian banking system, the Central Bank of Nigeria (CBN) released a revised regulatory capital policy that sets out the criteria that banks’ capital instruments must meet in order to qualify for to be authorized for regulatory purposes under the Basel III standards.
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It requires a minimum CAR of 15 percent for all banks and banking groups with international authorization and those classified by the CBN as domestic systemically important banks, while a minimum CAR of 10 percent applies for all other banks.
According to Fitch, most banks are well capitalized and able to absorb up to a certain level of loan losses based on their pre-impairment operating profit and total regulatory capital buffers without falling below the minimum CAR requirement.
The rating agency disclosed this in its Nigeria webinar entitled “Sovereigns & Banks – Mid-Year Outlook: Policy Settings Limit Upside Potential from Higher Oil Prices”.
According to the report, Guaranty Trust Bank can absorb loan losses of up to 16 percent and 26 percent of risk-weighted assets (RWAs) and gross loans, respectively, without exceeding the 17 percent minimum CAR.
According to Fitch, Stanbic IBTC can absorb up to 14 and 23 percent of RWA and gross loans, respectively, without exceeding the regulatory threshold of 11 percent CAR; Jaiz Bank can absorb 20 percent of RWAs and 14 percent of gross loans without exceeding the 11 percent minimum capital ratio; and Zenith Bank can absorb 9 percent and 15 percent of RWAs and gross loans, respectively, without exceeding 17 of the regulatory threshold.
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