DataPro Advises Banks to Prioritize Portfolio Analysis and Data Collection

From Peter Moses, Lagos

DataPro, a technology-focused rating agency in Nigeria, has urged banks to commence their portfolio evaluations and establish baseline data in light of the Central Bank of Nigeria's (CBN) impending transition to a risk-based capital requirement framework.

Idris Adeleke, part of DataPro's rating team and an Enterprise Risk Management (ERM) expert, shared this guidance during a recent webinar addressing the CBN's directive on stress testing.

The CBN has instructed banks to conduct stress tests—an evaluation geared towards identifying vulnerabilities arising from credit risks in financial institutions.

This instruction is set to be implemented starting April 1, 2026, immediately after the conclusion of the current banking sector recapitalization efforts.

During his presentation, Adeleke indicated that the directive signifies the CBN's initiation of a risk-based capital requirement aimed at bolstering the financial sector's resilience to support President Bola Tinubu's target of a $1 trillion economy.

To adhere to this directive, he recommended that banks act swiftly, stressing the importance of carrying out comprehensive portfolio analyses either immediately or following the disclosure of data as of March 31.

"Prioritize data collection and the migration of credit exposures to meet the stringent regulatory timeline," the risk management expert advised.

"It is crucial to ensure collaboration between risk, finance, and compliance teams to finalize stress test outcomes promptly."

He emphasized that a board-sanctioned stress testing report must be submitted to the CBN by the end of business on April 30, 2026.

Stress tests are designed to evaluate how banks can endure significant economic challenges, such as a major recession or market collapse.

DataPro highlighted that the new CBN directive will incorporate stringent stress assumptions that will have a direct effect on the Capital Adequacy Ratio (CAR), including a phased migration that obligates banks to consider a significant decline in asset quality across all credit portfolios.

Adeleke further noted that this stress test framework aligns seamlessly with Sections 13 and 63 of the Banks and Other Financial Institutions Act (BOFIA) 2020.

The expert pointed out that the regulatory body aims to ensure that banks possess sufficient capital to manage their risk exposure effectively.

"A robust capital base may prove ineffective if the underlying assets are actually diminishing," the DataPro representative clarified.

He further stated, "The CBN's objective is to prevent the new capital being raised from being immediately absorbed by existing non-performing loans."

He pointed out that numerous problematic loans are reflected in balance sheets since the directive mandates consideration of both on- and off-balance-sheet items during the baseline data collection process.

Adeleke explained that these simulations will allow the CBN to assess whether the new capital banks intend to raise can withstand potential defaults affecting their balance sheets.

He reiterated that the apex bank is shifting from established capital requirements to a risk-based capital model.

"Consequently, the results of these stress tests will establish each bank's official capital requirement until the next supervisory cycle," the expert mentioned.

While the primary goal of the recapitalization initiative focuses on size and solvency, he emphasized that the crux of the stress testing directive is to enhance stability and foster a risk-sensitive environment.

According to the ERM expert, the outcome of this risk-based capital assessment will help determine whether banks require additional capital to sustain their operations.

Furthermore, Adeleke remarked, "With Nigeria aiming for a $1 trillion economy by 2030, banks operating under such an economy must have a strong balance sheet to undertake necessary infrastructural developments."