• Friday, March 29, 2024
businessday logo

BusinessDay

Nigerian banks risk share, bond prices decline on Moody’s negative rating

Moody’s-Investors-Service

Banks in Nigeria are at risk of decline in stock prices as well as increase in yields on existing bonds following the negative outlook for Nigerian and other African banks by Moody’s Investor Service.

The rating review to negative from a stable outlook came barely a week after the New York-based agency changed the outlook on Nigeria from stable to negative.

Aderonke Akinsola, a banking analyst at Chapel Hill Denham, said the impact on banks could be on securities that these banks have, particularly in equity and debt securities.

“Based on the downgrade, what you would expect is that the international funds that have those Nigerian banks weighted in their fund indices could be rebalancing to reduce their exposures to securities in Nigeria banking securities,” Akinsola said. “Once that starts to happen, you might start to see their share and bond prices fall.”

The Nigerian banking index which tracks the 10 most-capitalised and liquid bank stocks shed 1.94 percent after the close of business on Monday, bringing its loss since the start of the year to 12.3 percent and outperforming the broad index of the Nigerian Stock Exchange, which has dropped some 15.1 percent since January.

Analysts said the downgrade was not unexpected as any review of a country’s rating is followed by a review of every company that operates in that country.

The only exception, Akinsola said, is if there is “something exceptionally well the company is doing that will make it perform better than the broad economy”.

“For Nigerian banks, it was expected that Moody’s will downgrade them having downgraded the country where they operate. If our economy is challenged, it would certainly affect all companies operating here,” Paul Uzuma, managing director, Halo Nigeria Capital Ltd, said.

“The banks will have to pay more interest for Eurobonds they issue in the international market. Likewise local loan notes which they periodically raise would come at a higher coupon,” he said.

While the negative outlook is for all banks in Africa, the projection by Moody’s stated that lenders in countries like Nigeria, South Africa, Tunisia and Angola “will face the greatest challenges; Egyptian, Moroccan, Mauritian and Kenyan banks will be more resilient”.

According to the report published by Moody’s on Monday, three factors were key drivers of the negative outlook. They include weakening operating conditions, political and social uncertainties, and rising asset quality pressures.

Weakening operating conditions

Moody’s said the change of outlook to negative from stable reflects the weakening operating environment for the African banks, even as it noted that the global economy remains sluggish with negative business sentiment and trade uncertainty clouding growth prospects.

The ratings agency said government debt in the continent was high and economic growth, which is forecast to expand by 4.1 percent in 2020, would remain below potential and insufficient to boost per capita income levels or increase economic resilience.

Banks in Nigeria would maintain high exposures to their respective sovereigns, linking their credit profiles to those of their government, the ratings agency said a statement.

“Weakening operating conditions are pressuring governments’ credit quality leading to a knock-on effect on banks through reduced business generation, slower credit growth and rising asset risk,” said Constantinos Kypreos, senior vice president at Moody’s.

Political and social uncertainties

Moody’s said political and geopolitical risks remain downside risks to economic growth and the business environment in Africa. Also, it noted that the trade tension between the United States and China could impact commodity prices, a situation that could weaken Africa’s exports to China and challenge the ability of exporters and their suppliers to service their bank loans.

However, it maintained that the new African Continental Free Trade Agreement (AfCFTA) could create new business opportunities for banks once non-tariff barriers are removed.

Rising asset quality pressures

Another reason for Moody’s downgrade of African banks is the problem loans which it said was primarily driven by rising government arrears, deficiencies in risk management practices, high loan concentrations, and borrower-friendly legal frameworks which could keep asset risk high.

“Importantly, banks will maintain high exposures to their respective sovereigns, which links and caps their credit profile to that of the government,” Moody’s stated.

“Many rated banks will, however, maintain good capital buffers, and good access to local currency funding and liquidity. These attributes will allow them to withstand the rising risks identified above,” it said.

Specifically, Moody’s expressed fears that even though non-performing loans were declining in Nigeria, they would remain high while banks continue to tackle legacy issues. Also, it noted that the three-year transition for IFRS 9 adoption would keep capital moderate for most banks.

“Local currency funding and liquidity is stable, while higher oil prices and partial liberalisation of foreign exchange markets have eased foreign-currency shortages. Banks’ earnings will be constrained by subdued loan growth and rising costs (IT investments, AMCON levy, and higher staff costs),” it said.

 

ENDURANCE OKAFOR & OLUWASEGUN OLAKOYENIKAN