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Nigerians disagree on Moody’s negative outlook for banks

Why Lagos remains Africa’s best investment destination

Nigerians, particularly, analysts in the financial services sector on Tuesday disagreed with , Moody’s Investors Service’s report that the outlook for Nigeria’s banking system remains negative, reflecting expectations of rising asset risk and weakening government support capacity over the next 12 to 18 months.

“Nigerian banks’ loan quality will weaken in 2021 as coronavirus support measures implemented by the government and central bank last year, including the loan repayment holiday, are unwound,” says Peter Mushangwe, analyst at Moody’s and the co-author of the report.

“The negative outlook also captures the weakening capacity of the Government of Nigeria to support the country’s banks in case of need, as reflected by the negative outlook on the government’s credit rating; on the other hand, Nigerian banks hold robust capital buffers and foreign-currency shortages will ease.”

Reacting to the development, Ayodeji Ebo, head, retail investment, Chapel Hill Denham, believes the government support measures are not going to unwind.

On March 3, 2021, the Central Bank of Nigeria (CBN) extended the discounted interest rate for its intervention facilities by another 12 months to February 28, 2020.

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In a circular to all banks and other financial institutions (OFIs), signed by Kevin Amugo, director, financial policy and regulation department, the CBN said the rollover of the moratorium on loans granted through banks and OFIs shall be considered on a case by case basis.

Ebo said with the vaccination and the number of Covid-19 cases reducing, and with the improvement in oil prices, businesses have almost resumed and would be able to repay their loans.

The report said banks in Africa’s biggest economy face higher asset quality risks as coronavirus support measures are withdrawn amid large single-name and sectoral concentrations and as banks hold a large volume of foreign currency loans. Banks balance sheets are also burdened by large volumes of Stage 2 loans. We estimate that between 40 percent to 45 percent of banking loans were restructured in 2020, easing pressure on borrowers following the outbreak of the pandemic.

Still, the government’s capacity to support banks may weaken, as it has an extremely low revenue base, which has remained below 10 percent of GDP since 2015. However, the government’s willingness to provide support to large banks in the event of a crisis and to sustain financial stability will remain high.

Moody’s expects economic activity to rebound in Nigeria, with real GDP growth of 2.1 percent this year and 3.1 percent in 2022, following a 1.9 percent contraction in 2020. The current high oil prices, if sustained, will further boost economic activity; however, the economy will remain sensitive to oil price movements.