Moody’s Assigns Stable Outlook on Nigerian Banking Sector

•  Fitch: Despite positive results by lenders, risks persist

Obinna Chima


Moody’s Investors Service has maintained its stable outlook on the Nigerian banking system,  reflecting the rating agency’s view that acute foreign-currency shortages in the country will gradually ease.

But just like Fitch, Moody’s, another international rating agency, held the view that loan risks in the country would remain high.

Moody’s stated this in a report titled: ‘Banking System Outlook: Nigeria.’With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our outlook period,” Vice President and Senior Analyst at Moody’s, Akin Majekodunmi said.

 “However, we expect asset quality to worsen slightly over the outlook period, as historically low oil prices, currency depreciation and economic contraction experienced in 2016 continue to generate new nonperforming loans in 2017,” he added.

The rating agency anticipated that Nigeria’s real Gross Domestic Product (GDP) growth of 2.5 per cent in 2017 and four per cent in 2018, after a 1.5 per cent contraction last year, as noted in March 2017.

The revival will be supported by government measures to expand non-oil sectors and its commitment to fund large infrastructure projects as well as by a partial rebound in global oil prices from lows last year, it stated.

Risks to asset quality are likely to remain high, with nonperforming loans (NPLs) likely to rise to between 14 and 16 per cent, from 14 per cent at end-2016. They should, however, reach a peak as write-offs, loan restructurings, and the strengthening economy takes effect.

“Nigerian banks should have sufficient capital to absorb expected losses, though Moody’s expects system-wide tangible common equity (TCE) to only decline slightly to 14.1 per cent of adjusted risk-weighted assets by year-end 2018 from 14.7 per cent at the end of 2016. The slight shift is primarily due to increased loan-loss provisions and the effect of further expected naira depreciation on the balance of risk-weighted assets denominated in foreign currency.

“Moody’s also sees the banks’ loan-loss provisioning weakening their net profitability. The rating agency expects return on assets to decline to around one per cent in 2017, from 1.3 per cent at the end of 2016 on account of high provisioning costs at around three per cent of gross loans.

“System-wide pre-provision income will likely remain robust, however, at around fourof average total assets, supported by high yields on government securities and profits on open foreign currency positions,” the agency added.

Finally, Moody’s considered there to be a high probability of the Nigerian government supporting banks in case of need, given the significant consequences of a bank collapse to both the payments system and the wider economy.

Meanwhile,  despite the positive financial results for 2016 posted by Nigerian banks notwithstanding the turbulent operating conditions, global rating agency, Fitch Ratings, believes that significant financial risks persist beyond the reported figures.

Fitch in its assessment of the banks’ 2016  earnings obtained yesterday, pointed out that the healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June.

It also stated that the banks also made higher United States dollar core income (in naira terms) and booked sizeable foreign-currency (FC) trading income, which offset rising impairment charges.

“While the banks’ performance ratios improved in the year, we note that a substantial part of earnings were non-recurring and will be difficult to repeat. Sector impaired loan ratios increased sharply but this was expected given the extent of Nigeria’s macro-economic challenges.

“Asset-quality metrics would have been even worse if not for high levels of restructured loans, particularly to the troubled oil sector. Low reserve coverage and high levels of FC lending add to our concerns about the banks’ long-term financial health. Capital buffers continue to be weak despite relatively high reported capital adequacy ratios (CARs).

“We maintain that ratios are vulnerable to even modest shocks for some banks. Year-end CARs declined due to the twin pressures of inflated risk-weighted assets (due to the revaluation of US dollar assets) and rising impairment charges, although this was partially offset by strong retained earnings, which benefitted from the revaluation gains. Funding and liquidity risks continue to be high. Loans/deposits ratios have been rising but are not excessive,” Fitch added.

They noted that the primary concern in the industry relates to FC liquidity, which it stated remained tight despite the authorities’ attempts to normalise the foreign-exchange interbank market.

“For 2017, we believe there will be a slight easing on the banks’ operating environment reflecting some early-stage improvements on the macro-economic front. We expect banks to remain profitable despite still modest credit growth and forecast further asset-quality deterioration, but at a slower pace. The big question is whether there will be improvement in FC liquidity, but this to a large extent depends on factors beyond the banks’ control,” Fitch stated.