Nigeria Resilient Capital And Wide Liquidity Buffers Support Stable Outlook Even As Risks Remain


Wednesday, June 19, 2019   /04:50PM / By Proshare Research / Header Image Credit:  Leadway Assurance


Moody’s Investors Service recently released its banking system outlook for Nigeria.

The report titled:  Banking System Outlook - Nigeria Resilient capital and wide liquidity buffers support stable outlook, even as risks remain highlighted key points to note and maintained a stable outlook on the Nigerian banking system.

The rating agency’s view reflects the banks' resilient capital buffers and their stable deposit bases, although it further states that Nigerian banks' asset risk and profitability will remain key rating challenges as it expects these challenges to gradually ease in 2020 as the economy improves further.

Below are the key summary points as raised by Moody’s Investors Services in the banking system outlook released on June 18, 2019


Economic growth will be modest

Real GDP will expand 2.3% in 2019 and 2.8% in 2020, up from 1.9% last year, but well below the level required to improve Nigerian living standards. Lending growth will recover in the second half of the year following a contraction in 2018, but it will remain subdued and will not appreciably boost banking revenue. The Nigerian economy will remain vulnerable to oil price movements.


Loan quality pressures will ease but remain banks' main weakness

Nonperforming loans1 (NPLs) will decline to 7% - 8% over the outlook period from 11.7% at year-end 2018 - still a high level. Higher oil prices will constrain new NPL formation while high loan-loss reserves will allow banks to write off some of their bad debts. These credit positives will be moderated by lingering risks from high loan concentrations and high delinquency levels.


Capital buffers will remain stable

System-wide tangible common equity will be stable at 16% of risk-weighted assets at year-end 2018, which will be sufficient to absorb losses under our baseline scenario. We expect subdued loan growth and prudent dividend payouts to support banks' capitalisation metrics.


Profitability will be strained

Banks revenue will be restrained by subdued loan growth while cost pressures, due to IT investments, an AMCON levy2 and higher staff costs, will slow pre-provision profitability. Still higher loan-loss provisioning charges following provisioning reversals last year due to the first time implementation of IFRS 9 accounting standards will eat into net profits. We expect return on assets of 1.5% - 2.0%.


Funding and liquidity will remain stable

Underpinned by solid deposit bases, banks' funding and liquidity profiles will remain stable. Foreign-currency liquidity substantially improved in 2018 and will continue to gradually improve as banks continue to moderate their foreign-currency lending.


Government support for the largest banks will remain high

Nigeria's capacity and willingness to support systemically important banks in times of stress remains strong, given the significant consequences of a bank collapse to both the payments system and to the wider economy.


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Proshare Nigeria Pvt. Ltd.
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