Devaluation: Banks face losses on borrowed funds

Deposit Money Banks that have obtained foreign loans running into hundreds of millions of dollars face record losses on the loans following the devaluation of the naira by the Central Bank of Nigeria on Tuesday.

According to top banking sources, Eurobonds and other dollar-denominated loans obtained mostly from international capital markets and not hedged may make some banks to record foreign exchange losses in their income statements.

This, it was learnt, might ultimately reduce the profitability of some banks in coming months.

     Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele

Nigerian banks have issued Eurobonds running into over $2bn, aside other dollar-denominated foreign loans.

One of the sources familiar with the situation said, “Some banks have borrowed money in dollars from international capital markets. These monies were brought into the country and put in their general pool of funds in the treasury.

“From the treasury, the monies were disbursed along with other funds into various investment sources including lending into oil and gas and other sectors. With the devaluation of the naira, the banks will need more naira to buy dollars in order to service those loans and pay the principal at maturity.”

The source, however, said there was no cause to worry because banks would even-out the foreign exchange losses with time because those differences would be factored into future lending and investments.

The official said, “With time, banks will factor in the 8.4 per cent devaluation in the naira into their future lending and investments. You know banks will not want to carry the losses. All these things will ultimately affect cost of funds in the near future. It will reduce profitability in the short run but not in the long run as those losses will be recovered in no time.”

Meanwhile, it has been gathered that individuals and companies which have borrowed money from banks may soon begin to get letters from the financial institutions informing them of their decision to review their interest rates after the devaluation of the naira and increase in the Monetary Policy Rate from 12 to 13 per cent.

A top bank official, who made this disclosure to our correspondent on Wednesday, said, “In the offer letter signed by customers that obtained loans from banks, there is a section that states that ‘we will inform if the markets conditions change’. This is part of what it means. Some of the banks will write their customers to review their interest rates in line with the new policies. This is irrespective of whether the loans were obtained before the policies were announced or not.”

Commenting on banks’ dollar-denominated loans, Afrinvest Analysts said there was the need for the CBN to carry out a stress test to ascertain the banks’ exposure to dollar-denominated loans.

“We do not have access to the banks’ books to determine those foreign loans in dollars that were hedged and those that were not hedged. The CBN may need to carry out a stress test to determine this in the light of the currency devaluation,” they noted.