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Moody’s, the credit rating agency, expects a stable outlook for the Nigerian banking system due to its projection of improving foreign currency risk. This is supported by recovering global oil prices and a more liberal foreign exchange market.
However, Moody’s expects banks’ earnings to come under pressure, capital metrics to decline marginally, and asset quality to remain weak between the next 12-18 months, resulting from declining yields on government securities, the introduction of new IFRS 9 accounting standards, and increase in Non-Performing Loans (NPLs) of the banks.
“Operating conditions for the Nigeria’s banks will continue to gradually improve over the next 12 to 18 months, but remain challenging,” Akin Majekodunmi, Vice President and Senior Credit Officer, at Moody’s said at a conference in Lagos.
“Nigeria’s growth prospects remain vulnerable to global oil prices, as crude oil will remain the nation’s largest export commodity and its main generator of foreign currency for the foreseeable future.”
Moody’s rates seven banks in the country which account for 68 percent of total assets in the Nigerian banking system.
“Nigerian banks’ profitability will nevertheless decline on account of lower yields on government securities, as well as a likely reduction in income from derivatives,” Moody’s said.
The MD of Cowry Asset Limited, Johnson Chukwu in an earlier published interview with BusinessDay said banks would have to review their strategies by moving away from FGN bonds and identifying credit worthy customers and lending to them.
Moody’s however, expects the pressure on the Nigerian banks’ profitability to be offset partially by a recovery in loan growth and transaction income from the expansion of digital platforms, and the ease of foreign currency shortages.
Although the rating agency sees banking system foreign currency liquidity to be vulnerable to global oil prices.
Oil prices on Monday 7 May, 2018 surged to a four year high of $74 per barrel amid Donald Trump’s withdrawal from the Iran nuclear deal.
Exposure to non-oil foreign currency borrowers is cited by the Moody’s to remain an additional source of risk for the banks, even though it does not expect a marked weakening of the naira in the foreign exchange markets over the next 12 months.
Foreign currency loans accounted for 40.7 percent of the system wide loan book at the end of the third quarter of 2017, down from 50 percent at year-end 2016.
A significant proportion, some 10 percent to 20 percent, has been dispersed to borrowers with little or no foreign currency income.
These borrowers are vulnerable to fluctuations in the naira/dollar exchange rate as a depreciation of the naira reduces their repayment capacity, Moody’s said.
However, at least half of all oil and gas loans have been rescheduled/restructured since 2015 and repayment schedules should now better match oil and gas corporates’ oil revenues and should translate into a gradual flattening in the percentage of problem loans in the sector, unless there is another significant fall in oil prices to below $40/barrel, according to Moody’s.
Moody’s conducted a scenario analysis to gauge the solvency of banks under both a base-case and a low-probability highly stressed scenario that is roughly equivalent to a 1-in-25 year event.
“Under our base-case (or most likely) scenario, we expect the system-wide capital ratio to remain roughly stable over a two-year horizon. This is driven by an increase in loan losses, due to an increase in system-wide non-performing loans and in risk-weighted assets, driven by loan growth. This impact would be offset by pre-provision income leaving the capital ratio virtually unchanged at 17.0%,” Moody’s said.
The base case is based on Moody’s current macroeconomic forecasts.
Meanwhile, high inflation and the continued vulnerability of the government’s balance sheet to shocks is seen by the agency as a restrain to Nigeria’s economy over the projected outlook period.
On the weakening of asset risk, Moody’s expects only a moderate deterioration in loan performance given the lagging effect of subdued economic growth – continued asset risk vulnerability from banks’ large exposures to the oil and gas sector and foreign currency borrowers in general capital weakening .
The banks’ capital levels are projected by the rating body to decline moderately on account of the introduction of IFRS 9. While it expects provisioning costs to be absorbed by pre-provision income.
On the stability of funding and liquidity, the Banks are projected to continue to benefit from stable deposit funding and solid liquidity buffers in local currency.
The agency also expects banking system income to be supported by both a recovery in loan growth to 10 percent over 2018 and an increase in noninterest income/transactional income through the promotion of e-banking platforms. Coupled with stable government support, as the authorities are projected to continue to have a strong willingness to support the banks.
Endurance Okafor & Micheal Ani
