Asset Quality Replacing Foreign Currency Liquidity as Main Risk for Nigerian Banks - Fitch


Monday, July 9, 2018 /06:54 PM / Fitch Ratings


Fitch Ratings says in a new report that operating conditions for Nigerian banks turned the corner in 2017 with the country coming out of recession and with some easing of foreign-currency (FC) liquidity by 2H17. For 2018, our focus shifts back to asset quality, which continues to weigh on the banks' risk profiles and ratings. 

Non-performing loans (NPLs) rose further in 2017, highlighting the severity of the economic shocks over the past three years. Banks have restructured large problem loans (including oil-sector lending) and escalated recovery efforts but remain exposed to high credit concentrations. Above-average NPL ratios were reported at several of the Fitch-rated banks, and these will be difficult to resolve swiftly. Further restructuring of already restructured loans is not inconceivable. 

More positively, almost all Fitch-rated banks were profitable in 2017 due to robust and diversified revenue generation despite the challenge of high loan impairment charges (LIC). While lending was slow under tough operating conditions, net interest margins gained from strong yields on T-bills. Fees and commissions, trading income and currency translation gains were notable contributors to non-interest operating income. For 2018, we expect some pressure on profitability will come from higher provisions under IFRS 9 and lower yields/volumes on T-bills. Operating costs are expected to remain high due to regulatory expenses and limited flexibility to cut costs. 

The banks' average Fitch Core Capital (FCC) ratio was 21.8% at end-2017; high from an emerging markets perspective and helped by strong retained earnings and stalled loan growth. We believe such levels are prudent given the banks' vulnerability to large credit concentrations. Nevertheless, some banks' regulatory total capital adequacy ratios (CAR) display limited buffers over required minimums. The initial application of IFRS 9 in 1Q18 has had a modest impact on CARs. 

FC liquidity risks have abated with banks tapping into increased US dollar inflows under the new investors-and- exporters window formed by the central bank in April 2017. As a whole, funding and liquidity benefit from large/stable deposit bases and large holdings of government securities. 

We expect loan growth of about 10% in 2018 given improving macro conditions and a general willingness to lend amid falling yields on T-bills. The banks will maintain strong profitability despite more stringent provisioning under IFRS 9 and lower yields on T-bills. The biggest challenge will be how they address weak asset quality as NPL ratios are likely to rise further in 2018. A strong recovery in sector asset quality is a longer-term prospect as it will depend largely on sustained recovery in the oil sector.

Proshare Nigeria Pvt. Ltd.

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