Nigerian banks resilient despite elevated credit risks – Moody’s

Moody’s Investors Service expects Nigerian banks’ profitability to remain sufficient to absorb rising bad loan provisioning which is being driven by the deteriorating repayment capacity of borrowers in the oil and gas sector.

“Over the next two years, we expect Nigerian banking system problem loans to rise above 5 percent, but remain below 10 percent, owing to the disproportionate exposure to the oil and gas sector, the high level of unseasoned loan stock as a result of strong loan growth in recent years, and the high level of foreign currency denominated loans,” Akintunde Majekodunmi, Vice President, Senior Analyst at Moody’s, said in a report on the sector, released yesterday.

“These loan portfolio characteristics are being pressured by Nigeria’s challenging macroeconomic environment.”

Subdued Nigerian growth this year is expected to weigh on asset risk and loan demand.

Moody’s expects Nigeria’s real GDP growth to decelerate to 3.5 percent in 2015 before recovering to 4.9 percent next year, from over 6 percent in 2014.

The resilience of the Nigerian banking system also stems from continued improvements to the regulatory and supervisory environment, as well as it’s predominantly deposit funded liability structures and low loan to deposit ratios.

System deposit formation is strong for Nigerian banks because of relatively low penetration, a high savings rate and expanding wealth levels.

Deposits which contributes 74 percent to system liabilities expanded to N21.6 trillion ($107 billion) as of end of June 2015 from N10.6 trillion in June 2011, while banks funding capacity is ample, with a loans-to-deposits ratio (LDR) at only 55.5 percent.

Nigeria’s banking system had enjoyed strong growth over the past decade, supported by increasing wealth and a high population that is largely under-banked.

Gross loans and advances expanded nine times to NGN12 trillion from under NGN2 trillion in 2005.

Banking assets as a percentage of GDP increased to around 70 percent in 2009, but reduced to around 30 percent in 2010 as a result of slower asset growth.

There is ample opportunity for growth for banks longer term, due to the undeveloped consumer and retail banking sector, said Moody’s.

“In the long-term, we also expect that retail lending will create enormous opportunities for Nigerian banks, given the population size and low penetration in the segment,” said Peter Mushangwe, a Moody’s Associate Analyst and co-author of the report.

In the meantime, investors have sold off bank stocks, as a result of the many challenges they have faced this year from regulatory actions to the deteriorating macro – environment.

The Nigerian banking index is down 13.02 percent year to Nov 13 , and is the worst performing sector after the consumer goods index.

A higher capital adequacy ratio (CAR) for systemically important banks (SIBs) which takes effect from 1 July 2016, may put further strain on lenders.

“We see another potential capital stress point for the Nigerian banks in the CBN’s updated capital computation template, which is yet to take effect but has tighter restrictions on credit mitigants and risk weights,” Adesoji Solanke, Vice President and bank analyst at Renaissance Capital said in a Nov. 13 note to investors.

FBN Holdings, Skye Bank and Ecobank Nigeria, which reported CAR of 16.2 percent, 17.3 percent and 16.9 percent, as at 9M’15, were the most at risk to the recent doubling of the general bad loan provisioning to 2 percent by the CBN, from a capital adequacy viewpoint, according to Solanke.

Nigerian commercial banks had N27.5 trillion in assets, with discount houses, merchant banks, mortgage institutions, micro-finance institutions, finance companies and bureau de change operators, having combined total assets of N1.9 trillion as of end-June 2015.

PATRICK ATUANYA