Moody’s: Nigerian Banks to Face Pressure with Reduced Dollar Deposit

By Obinna Chima

Banks in Nigeria are facing foreign currency shortages because of low oil prices, volatile foreign inflows and lower remittances amid the pandemic, threatening to renew foreign currency liquidity pressures that blighted them during a previous oil crisis in 2016-2017, Moody’s Investors Service stated in a report.

Moody’s stated this in a report obtained yesterday.

Commenting on the report, Analyst at Moody’s, Peter Mushangwe said: “Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016.

“Our moderate scenario where foreign-currency deposits decline by 20 per cent, while loans remain constant, would increase rated banks’ funding gap to N1.5 trillion ($3.8 billion), and to N1.9 trillion ($5 billion) under our severe-case scenario of 35 per cent foreign-currency deposit contraction, creating acute funding challenges.”

Oil and gas exports contribute about 90 per cent of Nigeria’s foreign currency revenue. Crude oil now trades around $40 a barrel, substantially lower than the average price of $65 in 2019 and $72 in 2018. However, Moody’s forecasted a range of $35 to $45 over the next 12 to 18 months for crude oil price.

“Prices within that range, or lower, in the second half of the year would lead to renewed dollar shortages at the banks,” it added.

Furthermore, the report showed that Moody’s-rated Nigerian banks reduced their foreign currency funding gap to a combined N354 billion ($984 million) in 2019, from N1.436 trillion ($5.5 billion) in 2016. The ratio of foreign-currency loans to foreign-currency deposits at Moody’s rated banks dropped to 106 per cent at the end of 2019 from 135 per cent in 2016 as banks cut back on dollar loans while building up their dollar deposits, the report stated.

It further explained that the smaller funding gap would enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs.

“However, in the event of foreign currency deposits contracting by 20 per cent or more, banks’ funding gaps will be significant,” it stated.

“Nigerian banks have invested more of their dollar deposits in liquid assets than in 2016, improving their ability to cover sudden deposit withdrawals in times of stress. Liquid foreign-currency assets rose 58 per cent to N4.4 trillion between the end of 2016 and the end of 2019, although this largely reflects a weaker naira.

“In dollar terms, liquid foreign-currency assets increased five per cent to $11.3 billion in 2019 from $10.8 billion in 2016. The proportion of liquid foreign-currency assets to foreign-currency assets rose to 42 per cent at year-end 2019 from 34 per cent in 2016,” it added.