Nigeria’s Banking Industry Risk Indicator (BIRI) score of 12.14 (out of 100) is a reflection of high risk following weak economic growth in the wake of the 2016 recession and declines in oil sector revenue, alongside a weak regulatory environment and poor living standards, according to a report by FitchSolutions.
FitchSolutions rank each market out of 121, where first is lowest risk and 121st is highest risk. Nigeria is in 117th position.
Nigeria’s BIRI scores show that its banking sector remains one of the most systematically fragile of the 121 banking sectors that the firm assesses as part of its BIRI universe, posing significant risks to macro financial stability in the country. The structural backdrop of the banking sector has improved somewhat, with the BIRI having risen from 0.00 in the fourth quarter of 2017 (Q417) to 12.14 in the first quarter of 2020 (Q120).
However, the latest score remains below the historical average of 21.72. Nigeria currently sits at 117th place out of the 121 countries that are captured in the rankings.
Nigeria’s score in the financial component stood at 46.84 in the first quarter of 2020 (Q120), reflecting moderate risk but an improvement from a score of 23.38 in the fourth quarter of 2017 (Q417). A return to positive economic growth following a recession in 2016 has facilitated strengthening asset quality, with the ratio of Non-Performing Loans (NPL) to gross loans decreasing from 14.81 percent in Q417 to 6.03 percent in Q120. However, the bank credit to GDP ratio remains low and has fallen from 13.36 percent in Q417 to 11.03 percent in Q120.
The Central Bank of Nigeria (CBN) staff report showed a marginal increase in the non-performing loans ratio in April as compared to February 2020.
Shonubi Folashodun, CBN’s deputy governor and a member of the Monetary Policy Committee (MPC) meeting, noted in his personal statement at the last MPC in May 2020 that amidst the general lull in the business environment, the banking system continued to show enduring resilience. In terms of size, industry total asset and deposit base rose further at the end of April 2020, maintaining the upward trend since the beginning of 2020.
Though industry liquidity ratio declined to 38.4 per cent, due mainly to the Loan To Deposit Ratio (LDR) policy, which continued to promote increased credit, the ratio remained above the regulatory threshold of 30.0 per cent. Industry capital adequacy ratio moderated to 14.9 per cent, as a result of increased risk weighted asset, which more than offset the marginal rise in qualifying capital, while the non-performing loan ratio rose marginally to 6.6 per cent. Returns on asset and investment were at levels that compare favourably with levels in similar jurisdictions.
FitchSolutions said Nigeria’s banking sector is set to grow over the medium and long term, with a slowing of growth in 2020, supported by new lending requirements which will help boost growth. However, “we expect high inflation and government borrowing to provide strong headwinds to growth over the medium term, the rating agency said”.
The firm continue to expect the changed minimum loan requirement to help drive client loan growth over the medium term. It revised its growth forecast from the previous quarter and expects client loans to reach N14.9 trillion in 2020 with growth of 2.5 percent from 2019.
Due to economic headwinds caused by the coronavirus pandemic, FitchSolutions revised its forecast for total banking asset growth to 5.3 percent to N44.2 trillion. Over the medium term, the firm sees average annual asset growth of 12.0 percent to N63.8 trillion by 2024.