Moody’s, Fitch maintain positive outlook for banks as risks persist

Two rating agencies, Moody’s Investors Service and Fitch Ratings, have maintained stable and profitable outlook for Nigerian banks, as operating environmental challenges, such as dollar shortage ease.

Deposit money banks are expected to remain profitable in 2017 after posting good financial results in 2016 according to Fitch Ratings’ Report, London, which says that significant financial risks persist beyond reported figures.

“With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our outlook period,” said Akin Majekodunmi, Vice President and Senior Analyst at Moody’s.

“However, we expect asset quality to worsen slightly, over the outlook period, as historically low oil prices, currency depreciation and economic contraction experienced in 2016 continue to generate new nonperforming loans in 2017.”

The aforementioned systemic risk hindered customers from paying interest on loans as capital ratios continue to worsen, especially for the mid-sized lenders.

Ayodeji Ebo, managing director, Afrinvest Securities limited, expects Nigerian banks to leverage on the high yield interest rate environment to cover up for the reduced income from lending, due to the high risk environment.

In the same vein, Ebo said with the improved activity in forex supply, banks earnings on foreign exchange transactions are also expected to recover. “Taking a clue from the Quarter One 2017 results of most of the banks, their performances exceeded analyst expectations, on the back of significant increases in interest income. Though we expect lending activities to improve before year end, banks remain wary of the harsh economic environment, to avoid another accumulation of impairment charges”, Ebo said in an emailed response to BusinessDay.

Uche Uwaleke, Associate Professor and Head, Banking and Finance department, Nasarawa State University, said if a good number of Deposit Money Banks in Nigeria could report good financial performances in 2016- a year in which the economy contracted by -1.5 percent, there is every likelihood that the banking industry generally, will perform better in 2017. This optimism is hinged on the fact that the economy is projected to record positive GDP growth this year.

“Another factor that may improve profitability is the effect of a possible easing of monetary policy in 2017 on the back of reduced inflationary pressure, which will enhance banking liquidity. Without doubt, good financial results of banks will positively impact the economy. The share price of these stocks are bound to rise, which is good news for the stock market”, Uwaleke said responding to BusinessDay email inquiries.

Nigerian banks are grappling with a devaluation of the naira, rising bad loans and a severe dollar shortage which tipped the economy into its first recession in 25 years.

However, the health status of deposit money banks 2016 net income was lifted by large one-off revaluation gains, following currency devaluation in June 2016 by the Central Bank of Nigeria (CBN).

The CBN had in June 20, 2016 removed its currency peg in an effort to alleviate the chronic foreign currency shortages choking growth in Africa’s biggest economy.

The banks also made higher US dollar core income (in naira terms) and booked sizeable foreign-currency (FC) trading income, which offset rising impairment charges. While the banks’ performance ratios improved in the year, Fitch noted that a substantial part of earnings were non-recurring and would be difficult to repeat. Sector impaired loan ratios increased sharply but this was expected, given the extent of Nigeria’s macro-economic challenges. Asset-quality metrics would have been even worse if not for high levels of restructured loans, particularly to the troubled oil sector. Low reserve coverage and high levels of foreign currency lending add to concerns about the banks’ long-term financial health. Capital buffers continue to be weak despite relatively high reported capital adequacy ratios (CARs).

“We maintain that ratios are vulnerable to even modest shocks for some banks. Year-end CARs declined due to the twin pressures of inflated risk-weighted assets (due to the revaluation of US dollar assets) and rising impairment charges, although this was partially offset by strong retained earnings, which benefitted from the revaluation gains. Funding and liquidity risks continue to be high. Loans/deposits ratios have been rising but are not excessive.

“The primary concern relates to FC liquidity, which remains tight, despite the authorities’ attempts to normalise the foreign-exchange interbank market. For 2017, we believe there will be a slight easing on the banks’ operating environment reflecting some early-stage improvements on the macro-economic front. We expect banks to remain profitable despite still modest credit growth and forecast further asset-quality deterioration, but at a slower pace. The big question is whether there will be improvement in FC liquidity, but this, to a large extent, depends on factors beyond the banks’ control”, Fitch said.

 

HOPE MOSES-ASHIKE and BALA AUGIE