Lenders loan growth to slump as economic crisis heightens

Growth in loans and credit in Nigeria, where the pains of a deepening economic crisis are beginning to bite is expected to slow down in the year ahead, according to analysts and market watchers who point to a further weakening in the country’s macroeconomic indicators.

“We believe the steady improvement in average loan growth over the past five years will be truncated in FY-15E as we expect average loan growth of 9.3 percent year on year (yoy) from 27.4 percent in FY-14,” said analysts at Chapel Hill Denham, a Lagos based investment firm, in its June 30 2015 banking report.

“This is mainly due to weak macroeconomic indicators, which were hitherto underpinning loan growth. We see Zenith, Stanbic and Fidelity as the major drivers of our sector loan growth forecast.”

A slump in the price of oil by 40 percent has forced the Central Bank of Nigeria (CBN) to twice devalue the currency in the past year, hike the interest rate and impose currency-trading restrictions to protect the naira, which has weakened 18 percent against the dollar in the same period.

The International Monetary Fund (IMF) has estimated the country’s growth will slow to 4.8 percent from 6.1 percent in 2014, about half of the rate of the past 15 years.

While lenders had viewed the oil and gas sector as a key growth area, recent oil shocks have raised questions about the assets quality of Nigerian banks, given the exposure of their loan books to the oil segment.

The tamer oil price provides a less compelling story for lending to upstream oil and gas, which accounted for 40 percent of 2014 credit growth,  said Wale Okunrinboye, research analyst with ARM Investment Managers, in an emailed note to BusinessDay.

“Similarly, naira softness and uncertainty over government payments should result in aversion to downstream oil and gas lending,” said Okunrinboye.

Despite the hike in interest rate to 13 percent from 12 percent previously stated and the harmonisation of  the CRR on private and public sector deposits to 31 percent, analysts are calling for further increase in rate in order to curb inflation and protect the depleting foreign reserves.

“A hike in interest rates would be positive for banks, “said Saheed Bashir, equity research analyst with Meristem Limited, a research firm, in an emailed statement.

Total assets of lenders were up by 8.96 percent to N30.90 trillion in the first quarter of 2015, from N28.36 trillion, as tier 1 banks make up 51.61 percent of the figure, based on data compiled by BusinessDay.

“In our opinion, sector loan growth will be determined by the liquidity of the banks, capital adequacy requirement, and pricing. In addition, we believe the banks will be generally cautious in the current macroeconomic environment,” said Tajudeen Ibrahim, analyst with Chapel Hill Denham. 

BALA AUGIE