Nigerian Banks at Severe Risk from Oil Price Slump, Coronavirus


Monday, April 06, 2020 / 10:25 AM / By Fitch Ratings / Header Image Credit: Akudi_tseja


Nigerian banks' credit profiles face severe risks from the oil price slump and operating environment disruption due to the coronavirus pandemic, Fitch Ratings says. Asset quality deterioration linked to high exposures to the oil and gas sector is the biggest threat to ratings.

Proshare Nigeria Pvt. Ltd.


Operating environment risks inevitably rise in Nigeria when oil prices fall. Oil exports represent 95% of the country's export revenue and strongly influence the broader economy. Falling oil revenue may also lead to further currency devaluation. Accordingly, the slump in oil prices raises the risk of a recession. Operating environment risks are compounded by economic and financial market disruption amid measures to counter the pandemic, putting pressure on all borrowers.

Proshare Nigeria Pvt. Ltd.


Forbearance measures announced by the Central Bank of Nigeria (CBN) will provide some relief to businesses and households and help the flow of credit into the economy. This will support reported asset quality metrics in the short term (the average Stage 3 loans ratio for Fitch-rated banks was 5.7% at end-2019) but asset quality could deteriorate significantly depending on the duration and severity of the oil price shock and coronavirus turmoil.


Fitch recently downgraded three Nigerian banks' Long-Term Issuer Default Ratings (IDRs) to 'B' from 'B+' and placed all 10 Nigerian banks' Viability Ratings and IDRs on Rating Watch Negative, reflecting our expectation that banks will face material pressures from the weaker operating environment in the coming months (see here). The resilience of banks' asset quality, profitability and capital during the economic downturn will influence, among other considerations, how we resolve the Rating Watches.


The oil and gas sector represented about 30% of Nigerian banks' gross loans at end-3Q19. Accordingly, loan quality is highly correlated to oil prices, as seen during previous oil price shocks in 2008-2009 and 2015-2016. Impaired loans have decreased since 2017 due to rising oil prices as well as recoveries and write-offs, but the current shock could lead to a significant increase. Any closures of oil fields due to a collapse in global oil demand would exacerbate the impact.


Proshare Nigeria Pvt. Ltd.


Asset quality risk is exacerbated by the rapid step-up in lending to certain riskier sectors, including retail, agriculture and SMEs, which banks took on to help meet the minimum loans-to-deposit ratio of 65% introduced in 2019. Unhedged US dollar loans to corporates expose banks to potential further naira devaluation, pushing up debt-servicing costs. Devaluation also affects SMEs, particularly in the manufacturing and services sectors given Nigeria's dependence on imports for raw materials and finished goods. However, the direct impact of devaluation on banks' regulatory capital is mitigated by their net long foreign-currency positions.


Problem loans (Stage 2 and Stage 3) averaged 23% of gross loans for Fitch-rated banks at end-2019, which is high. Stage 2 loans averaged 17% and include a large proportion of loans to the oil and gas sector already restructured due to the 2015 oil price shock.


The CBN's forbearance measures include the restructuring of loan tenors and terms for households and corporates most affected by coronavirus disruption, including loans to the oil, manufacturing and agriculture sectors. Banks will not have to classify these as Stage 2 or Stage 3 loans and this will mask the true extent of asset quality deterioration.


We expect a rise in restructured loans to 25%-30% of gross loans in 2020-2021 as banks extend tenors and lower interest rates to help borrowers. This could lead to a significant rise in impaired loans if low oil prices and severe coronavirus disruption are long-lasting. Loan-loss coverage of total loans of 4.9% at end-2019 was modest given loan concentrations by sector and operating environment risks. Loan-loss coverage of Stage 3 loans was reasonable at 97%, but coverage of problem loans was much lower due to low coverage of Stage 2 loans.


Proshare Nigeria Pvt. Ltd.


The weighted-average cost of risk for Fitch-rated Nigerian banks rose by 200bp during the 2015 oil price shock. We do not rule out a similar increase in 2020. The oil price shock and sharp macroeconomic deterioration will lead to higher expected-credit-loss provisions, undermining banks' profitability. Lower lending growth and subdued business activity negatively affecting non-interest revenues will also weigh on profitability.

Proshare Nigeria Pvt. Ltd.


Related News

1.       Fitch Downgrades 3 Nigerian Banks to 'B', Places All 10 Banks on Negative Watch

2.      Outlooks On Six Nigerian Banks Revised To Negative After Same Action On Sovereign

3.      Global Bank Rating Outlooks Are Still Skewed to the Negative

4.      Fitch Revises Outlook on UBA Subsidiaries to Negative on Parent Action

5.      Fitch Revises Outlook on 4 Nigerian Banks to Negative on Sovereign Action

6.      Moody's Affirms Bank of Industry Ratings, Changes Outlook to Negative from Stable

7.      Moody's Affirms Ratings of Nigerian Banks Following Action On The Nigerian Government

8.     Outlook for African Banks in 2020 Turns Negative as Operating Conditions Weaken

9.      UK Banking Outlook Changes To Negative From Stable As Operating Environment Weakens

10.  Fitch Affirms Union Bank of Nigeria Plc at 'B-'; Outlook Stable

11.   Fitch Affirms Stanbic IBTC Bank at 'AAA(nga)'

12.  Fitch Affirms Zenith Bank Plc at 'B' plus; Outlook Stable

13.  Fitch Affirms Bank of Industry at 'B' plus; Outlook Stable

14.  Fitch Affirms United Bank for Africa PLC at 'B' plus; Outlook Stable

15.  Fitch Affirms Access Bank at 'B'; Stable Outlook

16.  Fitch Affirms Guaranty Trust Bank at 'B' plus; Stable Outlook

17.   Fitch Revises Outlook on FBNH to Stable; Affirms at 'B-'

18.  S and P Global Ratings Affirmed ETI And Ecobank Nigeria Ltd Ratings; Outlook Stable

19.  Fitch Rates Access Bank's Tier 2 Subordinated Debt Final 'A(nga)'

20. Nigeria Long-Term Rating Lowered To ''B-'' On Weakening External Position

21.  Coronavirus to Weaken Sovereign Fiscal Positions; Track Record Matters

22. Fiscal Space Limited for Many Sovereigns

23. Rating Actions Taken On Several Corporate Issuers With Exposure To Nigeria

Proshare Nigeria Pvt. Ltd.

Related News On Banking Sector

  1. ACCESS Declares N97.5bn PAT in 2019 Audited Results, Proposes N0.40k Final Div. (SP:N8.50k)
  2. UBN Declares N19.9bn PAT in 2019 Audited Results Proposes N0.25k Final Div. (SP:N6.85K)
  3. STANBIC Declares N75.04bn PAT in 2019 Audited Results, Proposes N2 Final Dividend,(SP:N32.50K)
  4. GUARANTY Declares N196.8bn PAT in 2019 Audited Results, Proposes N2.50k Final Div. (SP:N23.80k)
  5. UBA Declares N89.09bn PAT in 2019 Audited Results; Proposes 80k Final Dividend,(SP:N6.70k)
  6. ZENITHBANK Declares N208bn PAT in 2019 Audited Results; Proposes N2.50k Final Div. (SP:N19.40K)
  7. FCMB Declares N17.7bn PAT in 2019 Unaudited Results,(SP:N1.90k)
  8. FIDELITYBK declares N29.5bn PAT in Q4 2019 Results; (SP:N2.11k)
  9. WEMABANK Declares N4.4bn PAT in 2019 Q4 Unaudited Results
  10. FBNH Declares N61.95bn PAT in Unaudited Q4 2019 Results, (SP:N6.95k)
  11. The GTBank 2020 Economic Outlook: Macro-Economic and Banking Sector Themes
  12. Banking Sector Update - CBN Wields Regulatory Stick Again
  13. Bank Equity Returns Do Not Look So Good in 2019
  14. Nigerian Banks: A Season of Mixed Performance; Reviewing The Growth Numbers
  15. ETI: Walking A Tight Rope; Earnings Down As Continental Headwinds Persist
  16. UBA 9 Months 2019 Result; Strong Top Line Earnings, Stable Outlook
  17. FBNH's Sober Year; Soft Top Line Earnings, Modest Bottom Line Growth 9M 2019
  18. Zenith Bank 9 months 2019 Result; Strong Profit Outlook from Ebusiness, Modest Top Line Earnings
  19. Access Bank 9Months 2019 Result; Strong Earnings, But OPEX Rises 47.7%
  20. GT Bank 9M 2019; Good Numbers, But A Howler In Loan Asset Growth
  21. Unity Bank Plc Q3 2019 Results: Pulling Out of A Ditch Slowly
  22. Banks' H1 2019 Numbers: Top Line Growth, Bottom Line Uncertainty
  23. Banking Sector Update - CBN Makes Statement Move On Intention To Drive Lending
  24. 12 Banks To Pay N499b CBN Fine For Loan Policy Breach
  25. Nigerian Banks Tried, But 'Not All' Made New Loans Threshold
  26. CBN Reviews LDR Target Upwards To 65%; DMBs Required To Attain LDR of 65% By Dec 31, 2019
  27. CBN's New Minimum LDR Requirement May Worsen NPLs
  28. CBN Mandates DMBs To Maintain Loan To Deposit Ratio Of 60% Effective Sept 30, 2019
  29. Nigerian Banks' Performance - H1 2018
  30. FBNHoldings Plc Q1' 2017 Performance Assessment Report Updated
  31. Analysing the Performance of FBN Holdings Plc - A Comprehensive Report

Proshare Nigeria Pvt. Ltd.
Related News