Banks May Fail Stress Tests if Downturn Deepen- Report

Banks in Nigeria will drop below minimum capital buffers required by regulators should the economy shrink further this year, according to stress tests done by the Central Bank of Nigeria (CBN).

Bloomberg reported that the tests show that a 3.5% contraction in gross domestic product in the third quarter may lead to lenders’ capital adequacy ratio dropping to an average of 11.2% from 15%, the Abuja-based central bank said in a report on its website.

A 4% decline in the economy in the final quarter will probably drag the measure to 9.3%, it said.

“The stress test was conducted within the background of a sharp fall in oil prices, reduced global demand for Nigeria’s oil products, decline in government revenue, unfavorable current-account position and a fall in GDP,” the central bank said.

“The severity of the simulated GDP contraction may be contained by a combination of fiscal and monetary interventions.”

The economy of Africa’s biggest crude producer shrank 6.1% in the second quarter as a lockdown to contain the coronavirus and an oil slump curbed government revenue and shuttered businesses.

GDP may contract 4.3% this year, the International Monetary Fund (IMF) said on Oct. 13. Protests over police brutality last month may also weigh on growth.

Nigerian banks with international operations are required to have a minimum capital ratio of 15%, while those with domestic businesses have a 10% threshold.

The average of non-performing loans could more than double to 16.7% this year should 25% of total credit extended in the economy that hasn’t yet been restructured be lost, the central bank said. NPLs improved to 6.4% in June from 11.1% a year earlier after loans were restructured.

The central bank has urged lenders to restructure 65% of the industry’s loans.