Nigerian Banks Face Risks despite Oil Boost
Nigerian banks’ operating environments could deteriorate between the financial year 2022 and 2023 as adverse global economic conditions feed through to the local economy, Fitch Ratings says in a new report.
Soaring inflation led the Central Bank of Nigeria (CBN) to raise its benchmark rate by 150 basis points on 24 May, and the pressures on banks’ profitability and asset quality will be higher than we had initially expected for 2022.
However, the sharp rise in oil prices this year will mitigate the economic impact of the global risks, and Fitch analysts do not expect Nigeria’s banking sector to experience a material shock.
High inflation and a potential economic slowdown will put pressure on borrowers, to the detriment of the banks’ asset quality. Inflationary concerns led the CBN to raise its benchmark rate by 150bp to 13% on 24 May, the first increase since 2016.
“We expect interest rates to increase further given accelerating inflation and tighter global financial conditions. This should support the banks’ net interest margins, which have been dented by low rates in recent years”, Fitch said. READ: Bonds Yields to Decline Further on Expected Liquidity Boost
The ratings firm said as a major oil exporter, Nigeria should see a boost to its economy and FX reserves from the current very high oil prices. However, low production and high import costs for refined products, and the need to subsidise households and businesses, will limit the benefits.
For banks, the most pronounced benefit of higher oil prices is decreased pressure on asset quality, according to the global rating agency. Fitch Ratings believes it could be difficult for the banks to maintain their performance momentum from 2021 when strong profitability was shaped by low credit costs and strong loan growth as the economy rebounded after the pandemic shock.
It also noted that oil prices and Nigerian banks’ non-performing loan ratios have been closely inversely correlated in the past, reflecting the outsized exposure to the oil and gas sector in loan books, the Nigerian economy’s high dependence on oil revenues, and the spill-over effects from oil to non-oil sectors. # Nigerian Banks Face Risks despite Oil Boost
