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Nigerian banks risk earnings dip, weaker lending growth – S&P

S&P Global Ratings has said banks in Nigeria could see reduced earnings, alongside weaker lending growth and asset quality, after the Central Bank of Nigeria (CBN) raised its main monetary policy rate by 150 basis points last week.

The global credit ratings agency said in its new report that the Monetary Policy Committee’s latest move not only raised the key interest rate to 15.5 percent but also banks’ cash reserve requirement to a minimum of 32.5 percent (up 500 basis points) amid persisting foreign exchange shortages in the country.

“The central bank has raised its MPR by a cumulative 400 bps so far this year in efforts to tame inflation, which stood at 20.5 percent in August. At the same time, it revised the rate on its intervention facilities (special funds offered at a discount rate to priority sectors) to 9 percent in August 2022,” it said.

According to the report, banks have used the CBN’s intervention facilities to extend credit to the private sector at a preferential rate, mainly to support small and midsize enterprises amid prolonged economic setbacks.

“In our view, the increase in the MPR and intervention funds rate suggests that the CBN has not closed the taps entirely, since banks should still be able to extend credit to priority sectors such as agriculture,” S&P said.

It said credit leverage in the economy remained low, with total private-sector loans representing only about 13 percent of GDP, despite loan growth averaging close to 20 percent over the past two years.

“S&P Global Ratings noted that Nevertheless, in our view, limited financial intermediation somewhat constrains the central bank’s ability to curb inflation using the MPR. Further rate hikes are possible, given the gap between inflation and the MPR, and will put pressure on banks’ loan portfolios as they pass the full rate increase to retail customers,” the report said.

“Although the cash reserve ratio is now 32.5 percent, we understand that the effective CRR has been greater than the previous statutory minimum of 27.5 percent introduced in 2019.”

Read also: Standard & Poor’s says Nigerian banks face reduced earnings and weaker lending growth

The ratings agency said Nigerian banks’ balance sheets had generally been very liquid. “However, an additional increase of their mandatory reserves, beyond the current discretionary debits, will likely lead to a freeze in lending in the short term and squeeze net interest margins.”

“On a positive note, non-interest-bearing deposits account for a large share of banks’ funding sources, which should mitigate the increase in the cost of funds. In their attempt to adapt to the CBN’s sharp liquidity tightening, banks have been purchasing government securities, but yields are low,” it added.

S&P Global Ratings said the 10-year yield on Nigerian government bonds had averaged about 13 percent, well below inflation.

It said rising production costs for the corporate sector, due to high energy prices, and tensions in the food-producing middle belt would likely keep inflation in double digits through 2023.

S&P said: “We expect banks’ earnings will fall as nonperforming loans (NPLs) increase and net interest margins decline. We expect the banking sector’s NPL ratio will deteriorate to 5.5 percent on average in 2022 after improving to 5 percent at year-end 2021, while the return on equity moderates to 13 percent from 14 percent.

“This is because of a weakening environment. Dollar-denominated oil revenue from the large oil-producing companies has been under pressure amid lower oil production, due to oil thefts, pipeline leaks, and terminal shutdowns in 2022. In addition, although foreign exchange reserves are still holding up at around $37 billion, pressures on the naira exchange rate are persisting.”

According to the report, the difference between the Nigerian Autonomous Foreign Exchange Fixing Mechanism rate and parallel rate has widened by about 65 percent.

“This will exacerbate foreign exchange scarcity as structural issues are yet to be addressed, undermining the performance of key sectors in the economy,” it said.

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