Clean up portfolios as CBN stress test begins

By Uche Usim

Nigeria’s banking sector is racing against time after the Central Bank of Nigeria ordered lenders to conduct stress tests that could redefine their capital strength and expose hidden risks.

To this end, DataPro, a technology-driven rating agency, has urged banks to urgently begin portfolio reviews and intensify data gathering to meet the fast-approaching compliance deadline.

Speaking at a webinar titled “Bank Capital Stress Testing: Getting the CBN Directive Right,” DataPro’s risk expert, Idris Adeleke, warned that delays could prove costly as the regulator shifts to a stricter, risk-based capital regime.

“Begin portfolio analysis now and prioritise data gathering,” Adeleke said.

He added that banks should act immediately or, at the latest, once their March 31 numbers are finalised.

The CBN directive, issued on March 6, mandates banks to test their resilience against severe economic shocks, particularly those tied to credit risk exposures. The exercise takes effect from April 1, 2026, following the conclusion of the industry-wide recapitalisation programme.

Adeleke said the move marks a significant policy shift designed to strengthen financial system stability in line with President Bola Tinubu’s $1 trillion economic target.

“The directive means the CBN is initiating a risk-based capital requirement in its drive to make the financial sector more resilient,” he said.

He stressed that compliance would require strong internal coordination across departments.

“Prioritise data gathering and migration of credit exposures to meet the strict regulatory deadline. Ensure collaboration across risk, finance, and compliance teams to finalize the stress test results on time,” he added.

According to him, each bank must submit a Board-approved stress testing report to the Central Bank of Nigeria by April 30, 2026.

The new framework introduces tough assumptions that could significantly erode banks’ Capital Adequacy Ratios (CAR), especially for institutions with weak asset quality.

Among the most critical is the “staged migration” rule, which assumes a sharp deterioration in credit exposures across loan portfolios. In addition, banks must apply a 10 per cent provisioning floor to sectors considered vulnerable under a “sectoral sensitivity” requirement.

The directive also takes a hard stance on insider lending, requiring all exposures linked to directors and insiders to be treated as fully impaired.

These provisions, DataPro noted, are intended to reveal the true health of banks’ balance sheets, beyond headline capital figures.

“The CBN goal is to ensure that the new capital you are raising is not swallowed up immediately by existing bad loans,” Adeleke said.

He cautioned that banks must take a holistic approach in compiling their baseline data, capturing both on- and off-balance-sheet exposures.

“There are a lot of dead loans brought into the balance sheet because the directive says both on and off balance sheets should be considered,” he said.

The stress testing exercise, he explained, will allow regulators to assess whether fresh capital injections can absorb potential shocks, particularly a surge in loan defaults.

Beyond compliance, the initiative signals a broader transformation in how capital requirements are determined in Nigeria’s banking system.

“The stress test result shall become the bank’s official individual capital requirement until the next supervisory cycle,” Adeleke said.

He distinguished the ongoing recapitalisation exercise, which focuses on scale and solvency, from the stress testing directive, which targets stability and risk sensitivity.

“The outcome of this risk-based capital charge is to determine the buffer and see whether you need additional capital to do your business,” he added.

With Nigeria targeting a $1 trillion economy by 2030, Adeleke said banks must be equipped to finance large-scale infrastructure and economic expansion without compromising stability.

“With such an ambition, banks operating within a $1 trillion economy should have a bulletproof balance sheet to take on those infrastructural developments,” he said.

The framework, he noted, aligns with Sections 13 and 63 of the Banks and Other Financial Institutions Act (BOFIA) 2020, reinforcing the regulator’s legal backing.

The DataPro webinar brought together industry stakeholders and provided practical guidance on executing the directive, including stress modelling techniques, validation of capital shortfalls, and use of standardised reporting templates.

Participants were also guided on how to meet the CBN’s threshold requirements, which range from 50 to 100 per cent under different stress scenarios.

With the April 30 deadline fast approaching, the message from DataPro is clear: banks must act swiftly, strengthen internal systems, and confront asset quality risks head-on.

In the new regulatory era, capital strength will no longer be judged by size alone, but by resilience under pressure.