Eight banks holding over $6bn NOP amidst FX scarcity —Research

A fresh research conducted on the financial results of eight Nigerian Banks has revealed a Net Open Position (NOP) of $6.334 billion.

This entails the banks are keeping over $6 billion with no transaction-backing, which is what the Central Bank of Nigeria (CBN) has forced them to offload.

Data obtained from the banks’ books and analysis by a non-bank securities trading firm in Nigeria, CardinalStone Securities (CSSL), showed that FBNHoldings has $1,700 million NOP; Zenith Bank has $1,500 million in NOP; GTCO has $1, 470 million; UBA has $796 million in NOP; FCMB has $495 million; Access Corporation has $308 million; Fidelity Bank has $101 million NOP while Stanbic IBTC stood out with $-57 million.

CSSL is a wholly-owned securities trading subsidiary of CardinalStone Partners Limited that offers an attractive bouquet of investment services to its clients.

The Central Bank of Nigeria (CBN) in a letter to banks, dated January 31, 2024, issued new prudential requirements on foreign currency exposures of banks.

The CBN’s move was hinged on the need to avert a potential foreign currency and other related risks in the banking sector as the absence of prudential guidelines has incentivised banks to hold excess long foreign currency positions (more FX-denominated assets than liabilities) through their Net Open Position (NOP).

The new foreign exchange (FX) exposure prudential guidelines provide that the NOP of the overall FX assets and liabilities (both on and off-balance sheet) of banks should not exceed “20.0 percent short or 0.0 percent long of shareholders’ funds unimpaired by losses” using gross aggregate method; banks with NOP outside the stipulated cap should regularise it not later than February 1, 2024; banks should adopt CBN’s new reporting template for foreign exchange exposure to foster daily and monthly NOP and foreign currency trading position (FCTP) and that banks should increase high-quality foreign assets (cash and government securities) to cover maturing FX obligations and have FX contingency funding arrangement with other financial institutions.

In addition, all new borrowing by/lending to banks should be in the same currency and the basis of interest rate for borrowing should be the same as that of lending.

It also stipulated that any clause of early redemption of Eurobonds should be at the instance of the issuer and approved by the CBN and all banks are required to adopt adequate treasury and risk management systems to provide oversight of all foreign exchange exposure and ensure accurate reporting on a timely basis.

Investment banking experts at Afrinvest (West) Africa Limited believe that the new guidelines on FX exposure of banks should deliver a short-term relief to the currently unsettled FX market.

“We hold that the policy action should drive reduced FX holdings by banks and boost FX supplies in the official channel given that an NOP condition of 20.0 percent short would compel banks with net FX assets above 20.0 percent of shareholders’ funds to either dispose of the holdings or take more FX liabilities to balance out their positions.

“Conversely, a NOP condition of 0.0 percent long implies that no new FX assets would be acquired by banks unless current holdings are below 20.0 percent of shareholders’ funds unimpaired by losses. Also, we believe the measures should temper the misalignment between lending and borrowing rates to/from banks, especially on FX-tied transactions.

“Nonetheless, we reiterate that the move is not a silver bullet to the ongoing FX challenges. Hence, we advise that measures that would enhance organic FX inflow channels – crude oil production and sales, diaspora remittance and FPIs & FDIs – be enhanced, while other FX leakage channels in the public sectors are completely blocked,” the analysts stated.

In addition, Afrinvest believes that the 24-hour implementation timeframe given by the CBN for banks to realign their NOP position appears hasty and may lead to weak compliance or unconventional adjustments with potential non-satisfactory outcomes in the near term.