Fitch, an international credit rating agency, has expressed concern that the Central Bank of Nigeria’s (CBN) recent ban on commercial banks from holding net long foreign currency (FC) positions will exacerbate the depreciation of the Naira.
According to Fitch, allowing banks to maintain control over their net long FC positions has historically aided in mitigating Naira depreciation.
However, the prohibition of this practice is anticipated to exacerbate the current forex challenges faced by the nation.
Although the CBN directed all commercial banks to cease the net long practice by February 1, Fitch suggested that this move could leave banks vulnerable to Naira depreciation without offering a viable solution to the forex dilemma.
Fitch underscored the significance of net long FC positions in shielding banks’ capital ratios from the adverse effects of devaluations.
Without this safeguard, Fitch contended that banks’ capital positions are more susceptible to potential Naira depreciation.
Additionally, Fitch raised apprehensions regarding the proposed foreign currency gateway bank by the CBN, citing potential adverse effects on the liquidity of Nigerian banks.
The commentary further addressed the downgrade of ENG’s Long-Term IDR, attributing it to breaches in regulatory minimum Capital Adequacy Ratio (CAR) requirements and insufficient internal capital generation amid Naira pressure and heightened asset-quality risks.
Fitch highlighted the challenges faced by ENG, including a substantial proportion of predominantly FC-denominated Stage 2 and Stage 3 loans, credit concentration risks, and their potential impact on the bank’s risk profile.
Fitch’s commentary casted doubt on the effectiveness of the CBN’s measures and expresses apprehension about their potential adverse ramifications on the stability and liquidity of the banking sector.
