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In 2016, Nigeria slipped into its first recession in 25 years and was forced to devalue the currency by more than 40 percent all because crude oil prices had fallen off a cliff.
The banking sector was worst hit as loans to the oil and gas sector, a third of total loans, went bad leading to a surge in non-performing loans (NPLs) ratio and lenders lost a chunk of their capital.
It’s 2020 and the current oil price rout may mean a similar scenario is well on the cards for lenders in Africa’s top oil producer.
Brent futures suffered the second-largest decline on record in the opening seconds of trading in Asia, behind only the plunge during the Gulf War in 1991. As the global oil benchmark plummeted to as low as $31.02 a barrel, Goldman Sachs Group Inc. warned prices could drop to near $20.
This is raising fresh concerns on how exposed the country’s licensed commercial banks are to the oil and gas sector through large syndicated loans, many of which were either not hedged or were poorly collateralised.
The managing director of one of the tier one banks in a conference call recently was reluctant to say where the oil and gas loans were hedged at because it seems everyone was caught unawares by the current oil rout.
There has been “significant restructuring” of energy-related loans since the price of oil began falling, Charles Akinbobola, an energy analyst at Sofidam Capital said.
“Most banks may need to extend the tenors of the facilities to reschedule cash flows,” Akinbobola said.
Kelvin Atafiri, who runs Cavazanni Human Capital Limited, an investment firm exposed to the oil and gas sector said the lower oil price will definitely have an effect on banks loans which might lead to deteriorating assets.
“When the banks were giving out the loans, they didn’t factor the current trends in oil price,” Atafiri said.
The banks’ exposure in terms of loan facilities to the oil sector, according to a recent Central Bank of Nigeria (CBN) financial stability report is about N6.1 trillion.
