Banks’ capital adequacy could worsen on IFRS 9


March 6, 2018 | 12:37 am
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Banks’ capital adequacy ratio may worsen as the adoption of the International Financial Reporting Standard (IFRS) 9 could force lenders to make more provisions for loans that were thitherto not recognized.

We predicts that the capital adequacy ratio across the industry will probably drop by 100 to 200 basis points, mainly because of the introduction of IFRS 9 reporting standards, which will require higher provisioning,” said Muyiwa Oni, analysts at Stanbic IBTC Holdings Plc

The introduction of these rules also have unintended consequences on the bank’s liquidity and margins.   

A sharp in oil price and a sever dollar shortage that tipped the country into its first recession in 25 years hindered customers from meeting their obligation.

Analysts say some small and mid-sized banks will run into troubles this year because their capital adequacy levels as they continue to grapple with huge rising bad loans.

The application of these new rules means loans that have not been classified as Non-Performing loans (NPLS) will now be classified and that could sour bad loans, according to Kunle Ezun, research economist at Ecobank Nigeria Limited.

Renaissance Capital, an investment banking firm, was of the opinion that, the tier one banks, specifically, GTBank, Zenith, UBA and Access could see Cost of Risk (COR) Come in marginally higher in full year (FY) 2018  as a result of the adoption of the new standard

A higher CoR means impairment charge will be high.  IFRS 9 Financial Instruments issued on 24 July 2014 in Nigeria is the IASB’s replacement of IAS 39 Financial Instruments: Recognition and Measurement.

The Standard includes requirements for recognition and measurement, impairment, derecognition and general hedge accounting. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase.

The standard was introduced to make recognize expected credit losses on in a time manner as delay in recognizing such expenses contributed to the global financial crisis of 2008.

But CFO Innovation and Strategic Intelligence, a research firms, said that IFRS 9 is principle based and it doesn’t provide any standard model for computing the Expected Credit Loss (ECL).

The research institute added that another worry for CFOs is how to measure the impact of the adoption of the IFRS 9 on bottom lines (profit) as huge write offs and change the accounting and reporting system such as a general system of ledger and journal could further expose banks to huge costs.

“In the Deloitte study, 81 percent  of respondents in banks with over €100 billion in gross lending and 64 percent of all other respondents said they expect a significant impact on the volatility of the bank’s P&L account under IFRS 9 compared to IAS 39,” said the report.

Banks in Africa’s most populous nation and largest economy are recovering from souring bad loans as the economy improved on the back of higher oil production and the apex bank’s new foreign exchange windows.

The cumulative Impairment charge otherwise known as loan loss expense of 13 banks that have released Third quarter 2017 results dipped by 20.15 percent to N287.30 billion, from N359.82 billion the previous year, based on data gathered by BusinessDay.

We estimate that NPLs will increase by up to 30 across assets classes on transition to IFRS 9,” said Gloria Fadipe, head of research of CSL Stock Brokers Limited.

Ayodeji Ebo, managing director and CEO of Afrivest Limited, says he doesn’t expect the impact of the adoption of the new standard to be very serious because some of them have done scenario testing before now.



March 6, 2018 | 12:37 am
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