The Capital Adequacy Ratios (CARs) of three big banks have fallen below regulatory capital requirement, the result of stress test conducted by the Central Bank of Nigeria (CBN) on the status of the banking system has shown.

Overall, the result of the solvency stress test indicated the potential for high contagion   risk   through   unsecured   interbank   exposure   as   three banks including two Systemically Important Banks failed CAR after a 100 per cent default shock.

The test, contained in the Financial Stability Report, released yesterday by the CBN governor, Godwin Emefiele, classified lenders into three groups: large banks, those with assets greater than or equal to N1 trillion; medium banks with assets greater than or equal to N500 billion but less than N1 trillion and small banks with assets of less than N500 billion.

The CAR is a ratio of bank’s assets to its risks and is 10 per cent for national banks and 15 per cent for banks with international subsidiaries and 16 per cent for Systematically Important Banks (SIBs). It said the baseline CAR for the banking industry, large, medium, and small banks stood at 14.78, 15.47, 12.75 and 3.14 per cent, respectively.

The  banking  industry stress  test was  carried  out  at  end-December  last year, covering  23 commercial  and merchant  banks, and   evaluated  the  resilience  of  the  banks  to credit,  liquidity, interest  rate and  contagion  risks.

The tests, which measured the lenders’ positions as at December last year, were conducted using the  Implied  Cash  Flow  Analysis  (ICFA)  and Maturity  Mismatch/Rollover  Risk methods, to  assess  the  resilience  of  individual  banks  and the banking industry to both liquidity and funding shocks.

It revealed that after a one-day run, the liquidity ratio for the industry would decline to 30.2 per cent from the 44.4 per cent pre -shock position and, to 9.73 per cent and 6.76 per cent after  a five-day  and cumulative  30-day  run,  respectively.

Similarly,  a five-day  and  cumulative 30-day  run  on  the  banking  industry  would  result  in  liquidity  shortfalls of N2.1 trillion  and N2.3 trillion, respectively.

The test showed that commercial banks experienced deterioration in assets quality  at end-December 2016. The ratio of non-performing loans (NPLs) to gross loans deteriorated by 2.3 and 8.7 percentage points to 14 per cent   compared with the levels at end-June 2016 and end-December 2015, respectively.

The deterioration in asset quality, the report said, was largely attributed to the rising inflationary trend, negative Gross Domestic Product (GDP) growth, and the depreciation of the naira.

The CBN said economic crisis adversely impacted borrowers, resulting  in rising NPLs which  required  additional provisioning by  banks , thereby reducing the banks’ CAR.

It said the decline  of  the  CAR  of small  and  medium  banks  did  not  weigh  significantly  on  the  industry CAR  because  large  banks  hold a  significant  proportion  (88.02 per cent)  of  total  banking  industry loans.

Analysis of banking industry total credit by sector showed that, oil and gas sector constituted 29.59 per cent of total banking  industry  credit, while manufacturing,  general commerce, government and others, constituted 13.41, 8.71, 6.25, 8.34 and 33.70 per cent, respectively within the test period.