Nigerian banks are operating in increasingly difficult conditions as this may result in a sharp deterioration of their profitability, asset quality, liquidity and capital ratios, according to Fitch Ratings.
In its report released weekend, Fitch said “The sector outlook is negative in December. Gross Domestic Product, GDP figures for second quarter show weaker year-on-year growth of 2.4 percent , down from four percent in the previous quarter, the slowest quarterly growth rate for over 10 years.”
The volatile operating environment is highly important in determining ratings for all Fitch-rated Nigerian banks, keeping their Viability Ratings low, in the highly speculative ‘b’ category. Nigerian banks are highly exposed to their domestic market and the economic slowdown will affect their performance.
According to Fitch “Nigeria’s oil sector growth slowed in second quarter, 2015 and non-oil growth was just 3.5 percent , down from 5.6 percent in first quarter of 2015.
Part of this slowdown was caused by temporary fuel shortages, which caused industrial production and manufacturing output to contract. Lower oil prices, reduced government spending and restrictions on foreign exchange availability are also taking their toll on performance across the economy.
Positively, agricultural output, construction, telecommunication services, internal trade and financial services continued to grow.”
Fitch explained that Nigerian banks have had to contend in recent months with the increased vulnerability of the oil and gas sector, pressure on the naira, the slower economy and tightening bank liquidity.
“These are all credit negative for the sector. Since the beginning of August, public sector deposits, which represent around 8% of total system deposits, have exited the commercial banks and must be held at a single treasury account at the central bank. This adds pressure to liquidity.
“No significant changes in economic policy have materialised following the change of government at end-March 2015, but until a new cabinet is formed and a clear policy framework is announced, uncertainty will weigh on the outlook” it noted.
According to Fitch “Loan growth contracted in first half 2015 which is likely to translate to weaker bank financial metrics for the year.
“We believe sector non-performing loans will rise above the central bank informal cap of five percent , but below 10 per cent of total sector loans by end-2015.
“Regulatory capital adequacy ratios are likely to fall further due to lower earnings, weaker asset quality and a limited ability to raise capital. Tier 1 capital ratios could fall below 15 percent for many banks, which is low by historical standards for Nigeria.
“In our opinion, key financial metrics reported by Nigeria’s banks are likely to continue to decline in the closing months of 2015. A prolonged economic downturn would likely to put pressure on bank ratings.”
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