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Moody’s says naira devaluation to weigh on banks’ asset quality

A weaker naira puts negative pressure on the asset quality of Nigerian banks, Moody’s said on Monday, after the Central Bank of Nigeria (CBN) adjusted the naira by 4 percent on the Investors’ and Exporters’ (I&E) FX Window.

The CBN on Friday quoted naira at N380 per dollar from N365 in the I&E window, while the official exchange rate was allowed to depreciate by 15 percent to N360 per dollar from N306.

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Moody’s told Bloomberg that the move “will put negative pressure on Nigerian banks’ asset quality and capital metrics as they have a high proportion of foreign-currency denominated loans”.

While a weaker naira increases Nigerian banks’ risk weighted assets related to their foreign currency loans, the banks hold good capital buffers, Moody’s said.

The CBN adjusted currency rates after the COVID-19 outbreak and consequent fallout of OPEC+ alliance pushed oil price to the lowest level since 2016 and beyond comfortable levels for the apex bank with weak external reserves.

Following the oil crash of 2016 and devaluation of naira, asset quality of banks deteriorated as loans went bad, especially their exposure to the oil & gas sector where loans were dollar-based.

Banks’ non-performing loan surged by 50 percent between December 2016 and September 2017 because it had become too expensive for creditors to repay loans priced in dollars.

A clear example was the syndicated loan $1.2bn to Etisalat which put about a dozen banks in precarious positions.

Banks were last year mandated by the CBN to lend as much as 65 percent of all their deposits, but priority was for manufacturing and similar businesses.

“I think banks have learnt their lessons from 2016 and most of them have been cautious in granting foreign currency loans despite a stable economy since 2007,” said Gbolahan Ologunro, an analyst at Lagos-based CSL Stockbrokers Ltd.

Ologunro explained that the impact of the devaluation and sharp drop in oil price would weaken asset quality of banks but the impact would not be material enough to give rise to significant erosion of capital adequacy levels in the entire industry.

According to the banking sector analyst, lenders have since 2017 increased their risk-assessment framework, while some have restructured their loan books and taken additional measures to ensure their obligors have hedge contracts as protective measures.

“However, tier-one banks like GTBank, Zenith, Access Bank, UBA are in better position to weather the storm than their mid-tier peers,” he said.

Meanwhile the CBN, in light of the coronavirus outbreak, granted all DMBs (Deposit Money Banks) leave to consider temporary and time-limited restructuring of tenure and loan terms for businesses and households most affected by the outbreak, particularly the oil and gas, agric, manufacturing, it said.

Bad loans dropped by 50.8 percent year-on-year to N1.139trn at the end of Q3 2019, according to data from National Bureau of Statistics (NBS). Oil & gas saw a decline of 73.64 percent.

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