Nigerian and other African banks are expected to be confronted with a tough operating environment next year as nations grapple with high debt distress, according to Fitch Ratings, an International credit rating firm.
The rating firm disclosed this in its African Banks Outlook 2025 report where it stated that African banks will remain exposed to domestic and global operating environment risks and that while most countries show good resilience, a fall in commodity prices cannot be ruled out.
“Most banks will be able to address asset quality risks through strong pre-impairment profits stemming from high interest rates, satisfactory loan growth, solid non-interest income notably trading gains and strong operating efficiency,” Fitch Ratings said.
“The performance will remain solid, but we expect it will drop slightly in those countries where lower interest rates will translate into lower yields on government securities,” it stated.
Fitch Ratings said capitalisation, funding, and liquidity should remain comfortable in most markets.
“A major risk to the profiles of African banks that Fitch pointed out was sovereign debt distress, mainly because many sovereigns face very high debt-servicing burdens,” it said.
It also stated that reduced interest rates will likely underpin demand for credit and combined with less volatile exchange rates, support confidence and investments.
“Asset quality risks will remain prominent, with households and businesses being hit by high inflation and interest rates.
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“Nevertheless, we assume a small reduction in impaired loan ratios due to loan growth, declining interest rates, and lower inflation,” Fitch Ratings said.
Meanwhile, Fitch said the pursuit of some economic reforms by President Bola Tinubu’s administration has improved prospects for the country’s credit profile.
However, it highlighted some challenges, including ad hoc or insufficiently communicated policy implementation that has constrained investors’ confidence.
It said that despite the introduction of reforms in the foreign exchange market, the latest being the electronic matching platform for all foreign exchange transactions, the FX policy remains hampered by a lack of transparency in several areas, including the level of net reserves.
“A divergence between the official and parallel market rates has re-emerged in recent months, pointing to slower-than-expected progress on reforms and lingering FX strains. Fiscal policy is another source of uncertainty for 2025. The government’s recent 2025-2027 Medium-Term Expenditure Framework (MTEF) set out plans to narrow the budget deficit more sharply than we had expected.
“However, the MTEF’s assumptions about oil prices and production ($75 per barrel and 2.06 million barrels per day, including condensates) are more optimistic than Fitch’s ($70/bbl and 1.77 mbpd, respectively),” it said.
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