Fragile Macro Conditions to Hinder Loan Creation

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Thursday, July 02, 2020 / 11:17 AM / by CSL Research / Header Image Credit: Ringgit Plus

 

Fitch ratings agency in a recent report on the Nigerian banking sector expressed that the present economic downturn will weigh heavily on the ability of Nigerian banks to grow their loan books. The agency projected that loan growth will decline from 14% year-on-year in 2019 to 2.5% in 2020, before improving slightly to 4.3% in 2021. According to the agency, the downturn in the oil sector and the restrictive measures put in place by the government to limit the spread of Covid-19 will reduce corporates' appetite for credit, causing loan growth to slow significantly over 2020.


We recall that in July 2019 when the apex bank introduced a minimum loan-to-deposit ratio (LDR) of 60% (which was later increased to 65% to be met by December 2019) for commercial banks, banks were compelled to grow their loan book given the penalty of additional Cash Reserves Requirement (CRR) of 50% of the lending shortfall of the target LDR.


Based on data for banks under our coverage, average loan growth in 2019 stood at 25% y/y (excluding Sterling bank which had a marginal decline of 0.4%). Given the dual shocks (COVID-19 and oil price shock) confronting the economy, we expect commercial banks to adopt a cautious approach to creating risky assets due to the elevated risk in the macroeconomic environment. 


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On the demand side, we expect corporates to reduce their demand for credit, in response to weakening aggregate demand, re-emergence of liquidity challenges in the FX market, increased uncertainties among businesses and the disruptions to the supply chain. We also expect some large corporates who are in need of liquidity for working capital requirements to resort to the debt market via the issuance of commercial papers given the low yield environment.


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