Global rating agency, Fitch, yesterday, declared that the return of Nigerian banks to the international bond market will reduce the country’s foreign currency (FC) liquidity risk.
Fitch in its latest rating, yesterday, said: “The return of Nigerian banks to the international bond markets marks a small step towards reducing maturity mismatches between foreign-currency assets and liabilities, this is credit ‘positive’ as it lessens FC liquidity risk, but the impact will be modest as the new bond issuances are small relative to total term FC lending.” The rating agency said Nigerian banks are infrequent issuers of Eurobond on the international capital markets, but three leading banks with deposit market shares near or above 10 percent have issued medium-term Eurobonds since fourth quarter of 2016.
They are Zenith Bank $500 million; United Bank of Africa $500 million and Access Bank $300 million. Fitch further noted that this week, Fidelity Bank, issued $400 million, adding that outstanding foreign currency bonds issued by banks totalled $4 billion at the end of June 2017, the bulk of which is in Eurobonds. The renewed interest from international investors seeking yield, according to Fitch, has enabled several banks to issue Eurobonds since late 2016. In most cases, the issuance will boost foreign currency funding rather than simply refinance maturing foreign currency debt, it added.
The agency explained that Nigerian banks have traditionally operated with significant maturity gaps, funding longer-term loans with short-term customer deposits, as is the case in many emerging markets. For foreign currency liquidity, there are no prudential limits in place.
Fitch noted that the Central Bank of Nigeria’s regulatory liquidity ratio (requiring banks to hold liquid assets equivalent to 30 percent of total deposits) is focused exclusively on naira liquidity. “There are regulatory limits to control open foreign currency positions in banking and trading books, but these targets the management of market risk and its potential impact on banks’ capital rather than liquidity risk. We estimate that about half of all bank loans are medium-term with maturities of three to four years.
These are largely in foreign currency. This is a high share for a low-rated market where banks have limited access to longer-term foreign currency funding. Sources of longer-term foreign currency funding are limited for Nigerian banks and we estimate that foreign currency funding equates to less than half of foreign currency sector loans.”