Nigerian Banking Sector Recovery Still Hampered By Bad Loans


Monday, July 29, 2019  / 09:00AM / By Fitch Ratings / Header Image Credit: Brand Spur

The Nigerian banking sector's high stock of bad loans continues to weigh on banks' credit profiles, and asset quality remains a key sensitivity for all Nigerian banks, Fitch Ratings says in a new report. Operating conditions have eased but we do not expect asset quality to improve significantly this year as banks continue to deal with impaired and other problem loans. We believe new regulation to encourage lending could lead to weaker asset quality and erode capital.

Nigerian banks have suffered from high credit losses in recent years, particularly from their exposure to the oil and gas sector. Stage 3 (impaired) loans under IFRS 9 were high at 9.4% of gross loans at end-2018, and banks also have large stocks of other potentially problematic Stage 2 loans. These mostly comprise restructured loans, and accounted for an additional 16% of gross loans at end-2018.

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Loan growth was only 1% at Fitch-rated banks in 2018, reflecting tight monetary policy, banks' reluctance to lend in uncertain economic conditions and the attractive yields they can earn by holding Nigerian T-bills. However, we forecast 10% loan growth for 2019 in light of the Central Bank of Nigeria's recent move to incentivise lending by requiring banks to have a loan-to-deposit ratio of at least 60% at end-September 2019.

The central bank's intervention could be credit negative for the banking sector as it may force rapid and uncontrolled loan growth, which could increase asset-quality problems and erode banks' capital ratios. It is unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards. We will monitor how lending develops in 3Q19 at the sector level and at individual banks. Excessive loan growth, particularly relative to the market average, or other signs that a bank's risk profile may be deteriorating, could lead to negative rating action.

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We expect banks to continue to report good profitability on solid revenue generation and stabilising loan impairment charges. This allows the build-up of capital internally and we view the sector's capitalisation as satisfactory. Funding and liquidity is improving with faster deposit growth both in local and foreign currency. Increasing foreign-currency liquidity and better access to foreign currency have reduced banks' reliance on wholesale foreign funding, with some banks repaying their Eurobonds early, reducing their refinancing risks. The sector has USD2 billion of outstanding Eurobonds, which we expect banks will redeem rather than replace, given their low appetite for foreign-currency lending.

Most Nigerian banks' Issuer Default Ratings are constrained by the country's operating environment and 'B+'/Stable sovereign rating. Guaranty Trust Bank, United Bank for Africa and Zenith Bank are the highest-rated banks at 'B+', reflecting their stronger company profiles and financial metrics. Other banks are rated one or two notches lower.

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