Deterioration in macroeconomic conditions brought on by the coronavirus pandemic and a sharp drop in crude oil price could force banks to stop lending to the real sector of the economy.
Analysts say banks will be reluctant to create new loans in view of the disruption to economic activities following the lockdown in some key states across the country as well as the increased risks to asset quality.
That’s double whammy for a country reeling from high employment rate, spiraling inflation, and decrepit infrastructure, and the virus has compounded such woes.
“If the economy is fragile as we are seeing, lenders may be hesitant to lend as they fear that loans may go bad. And if the loans go bad, that might result in spiralling non-performing loans that will impair their capital,” said Ayodeji Akinwunmi, head of corporate banking at FSDH Merchant Bank.
“The situation is presenting an opportunity for government to diversify the economy away from reliance on oil,” said Akinwunmi.
With business activities grinding to a halt due the spread of the pandemic, customers may find it difficult to pay interest on money borrowed from financial institutions.
Credit creation to the economy has been improving since the central bank introduced stringent measures such as hike in minimum loan-to-deposit ratio to 65 percent, as well as banning corporates and pension fund administrators (PFAs) from participating in its Open Market Operation (OMO).
According to the recent data on the banking sector released by the National Bureau of Statistics (NBS), banking sector credit to the economy grew for the second consecutive quarter by 5.8 percent quarter on quarter (q/q) in the fourth quarter (Q4) 2019 to N17.2 trillion, the highest level since 2007.
Accordingly, credit growth rose significantly by 14 percent year on year (y/y) in 2019 compared to the decline of 4 percent in 2018.
Oil price edged up to about $35 a barrel on Friday, below the government’s $57 budget benchmark, after it had fallen below $25 a barrel, amid a price war between Saudi Arabia and Russia and the impact of the coronavirus pandemic.
Most Nigerian lenders have their oil exposure hedged at $40-$50 a barrel, which will mean they would have to make provisions if prices remain where they are, said Emmanuel Adeleke, a banking analyst at ARM Investment Managers in Lagos. He “expects flat growth in earnings for most banks this year”.
However, the Banking Index was up 3.70 percent on Friday, thanks to a slight rebound in oil price that boost investors’ confidence.
“On the demand side, we expect the pass-through impact of subdued economic activities to constrain the demand for credit from individuals and corporates,” said analysts at CSL Securities Limited.
“In the medium to long term, credit creation in the economy depends on the pace of flattening in the curve of COVID-19 cases as well as rebound in oil prices,” said the analysts.
BALA AUGIE
