While current falling oil price experienced in the global crude oil market space darkens further outlook for the Nigerian economy, the banking sector particularly is not immune to its effects if trend continues considering its heavy loan exposure especially to the oil and gas sector of the economy coupled with financial intermediation role to other private sectors.
On Wednesday Brent crude oil price plummeted about 5 percent to a 7-month low level of $56.23, a level below Nigeria’s budgeted oil price benchmark, adding fresh threat to the country’s current precarious state.
Analysts say the deepening tensions between the US and China following the Beijing decision to allow the renminbi to fall below 7 to the dollar after the US slapped new sets of tariffs on the Asian country, are damaging oil prices.
The National Bureau of Statistics (NBS) in April revealed Nigeria deposit money banks’ (DMBs) domestic component exposure to the oil and gas industry was to the tune of N1.86 trillion, 39.70 percent of a total loan portfolio of N4.68 trillion to the sector. This leaves foreign component exposure to account for 60.3 percent (N2.82 trillion).
Evident in the NBS bank credit report for Q1 2019 is the fact that Nigerian banks are more exposed to the oil and gas sector than any other sector of the economy. In Q1 2019, credit to the sector accounted for 22.96 percent (N3.49 trillion) of banks total credit to the private sector, hence opening up the industry to shocks in crude oil prices which is in nature very volatile.
Sequel to the above report of banks credit by the NBS in April, crude oil price in the global market had slumped about 25 percent from highest peak of the year at $74.57 in April which as seen Nigeria upstream oil and gas companies share price trend downwards to their year low coupled with prevailing negative market sentiment.
While this maybe too early to start igniting concerns on the implications on the asset quality of banks given their high level of exposure to the oil and gas sector, “for banks to start feeling the impact, the downturn in oil prices will need to match pre-crisis level in 2015/16,” Gbolahan Ologunro, analyst at CSL stockbrokers told BusinessDay.
Consequently, if Brent settles below $40 levels, then there is a high likelihood of increased impairment charges when banks report their numbers.
In the last 3 years, Nigeria banks’ NPL has grown at an annual average of 10% after the spike in NPL in 2016 following the global oil price shock which saw the economy plum into a recession. In April 2019 however, NPL of banks in the oil and Gas sector of the economy declined 10.71 percent to N777. 84 billion year on year.
Recall in the bid to boost the Nigerian private sector and invariable grow the economy, the CBN mandated deposit money banks to lend more or face rise in minimum reserve requirements to 50 percent.
This saw loan to deposit ratio of banks increased to 60 percent which some analyst fear it mat worsen bank’s Non-performing loans (NPL).
However, most banks have not grown their loan books aggressively despite the unorthodox policies of CBN, compelling them to increase their lending to the private sector.
“With the recent happenings in the oil banks, we should expect banks to be more cautious in creating risk assets. For banks with legacy issues, loan growth will remain muted in the short to medium term” Ologunro noted.
In the bid to align to supervisory regulations, historically banks’ appetite to the Oil and Gas sector has always outweighed other sectors of the economy.
“Current trend in crude oil prices will see foreign assets held by Nigerian companies decline in value when converted to naira which in turn affect their earnings. This therefore threatens the loan book of banks and may see them slow down lending going forward,” Olalekan Ipele, Investment Analyst at Lagos based Investment Bank, PAC Capital.
