Nigerian Banks Face Danger Of Capital Erosion – Fitch Ratings

Global rating agency, Fitch Ratings, yesterday, said the generous dividend policies of a majority of Nigerian banks, if not adequately addressed, will lead to an erosion of their Tier One capital.

The rating agency also predicted an improved financial performance for banks in the 2011 financial year. Tier 1 capital is the core measure of a bank’s financial strength from a regulator’s point of view. It is composed of capital, which consists primarily of common stock and disclosed reserves, (also called retained earnings), but may also include non-redeemable non-cumulative preferred stock.

According to a report by the rating agency, entitled, ‘Nigerian Banking Sector,’ Tier 1 Capital ratio may continue to be eroded by asset growth and low internal capital generation due to generous dividend policies. Fitch noted that:“Considering the difficulties in raising fresh capital after the banking crisis, we expect banks that hold higher levels of Tier 1 capital to be better placed to grow.

“This is because we believe that higher levels of capital are appropriate for Nigerian banks in light of the difficult local operating environment and credit concentrations as well as low impairment coverage ratios in the case of certain banks.”