Analysts’ expectations on financial system stability dim over rising NPL ratio

Expectations of analysts and investors on the expected release of the Financial Stability Report (FSR) by the Central Bank of Nigeria (CBN) today look low following the rising non-performing loans (NPLs) of the banks.

The NPLs of banks rose by approximately 70 percent to N628.54 billion at end-June 2015, from N363.31 billion at end-December 2014. At 4.65 percent from 2.88 percent, the NPL ratio remained within the prudential limit of 5 percent, though trended closer to the regulatory threshold, reflecting greater levels of stress in the banking industry, the CBN stated in June 2015 FSR.

However, analysts do not expect any positive outcome from the report following the huge exposure banks to the oil sector and the attendant fall in oil prices, as well as foreign exchange challenges.

“Given these downside risks and their impact on the quality of assets held by institutions in the banking sector, we do not expect a positive difference in the status report on the Nigerian banking industry (particularly, as regards the industry-wide NPL ratio) compared to six months ago,” Olutola Oni, analysts at WSTC Financial Services Limited, said in an e-mailed response to BusinessDay.

Oni said the next CBN’s financial stability report would be centred on the global and domestic sources of risks to the Nigerian economy, and by extension, the financial system. The primary sources of global risk are volatility of crude oil price and the associated exchange rate pressure for the Nigerian economy and banks. The domestic downside risks are increasing output gap, weak Federal Government earnings and dwindling FX reserves.

The last edition of FSR highlighted the key developments in the Nigerian financial system during the reporting period and the associated macro-prudential and economic stability issues. It details the efforts of the CBN to curb the pressure on the naira and stabilise the exchange rate as well as facilitate the strengthening of the economy through real sector intervention schemes.

These measures, according to Godwin Emefiele, governor of the CBN, included the review of the foreign exchange market windows and the inclusion of additional items to the forex exclusion list.

The CBN yesterday assured customers and stakeholders that it would not allow the banking system to be used as a conduit for any illicit transactions.

In a statement signed by Isaac Okorafor, acting director, corporate communication, the CBN informed all customers of Deposit Money Banks, other stakeholders, and the general public that it as fully aware and indeed a part of the ongoing investigations of certain financial transactions in some banks by law enforcement authorities.

“The CBN is also carrying out its own special examinations and investigations to ascertain the veracity of some allegations, as well as the extent and persons that may be involved in such activities,” the statement said, adding that some of these investigations were routine and only relate to isolated transactions, “therefore it is important to state that the safety and soundness of the Nigerian banking industry remain strong.”