Nigerian Banks Prudential Ratios to Be Severely Impacted in 2020
With the rampaging coronavirus and associated impacts on the economy, analysts have stated that banks prudential ratios are expected to be impacted.
According to Cardinalstone in a report, it explained that COVID-19 pandemic holds several ramifications for banks in 2020.
Following strong Q1 earnings, analysts at Cardinalstone said they envisage a slowdown in Q2 reflecting the impact of lockdown measures enacted during the quarter.
“We project a mild improvement in Q3 and Q4 as the economy opens up in phases”, the investment firm remarked.
Specifically, Cardinalstone said interest income could be impacted by lower asset yields and loan restructurings.
The firm reckoned that organic loan growth could slow down on less favourable macro conditions and asset quality fears.
Deposit growth could ease as households increase consumption at the expense of savings due to shrinking disposable incomes.
“Prudential ratios like capital, liquidity and asset quality indicators are likely to be severely tested.
“While it is likely that FX impact could support the value of banks’ credit assets through the year, it is our view that organic credit extension may falter in subsequent quarters”, Cardinalstone said.
The firm said its broad views regarding banks’ lending in subsequent quarters reflect the recent fiscal and monetary initiatives in support of both the Healthcare and Agriculture sectors which may signify lending opportunities for banks.
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Likewise, analysts explained that the COVID-19 induced acceleration in the adoption of digitalization by households, businesses and government could support ICT lending.
Lending to strategic sectors such as Oil & Gas and Manufacturing which account for 41.0% of sector credit is likely to be soft, with an increasing focus on managing already existing relationships and assets.
“We note that specific opportunities may exist for quality obligors with working capital and CAPEX needs”, Cardinalstone stated.
It said a sustained easing of lockdown measures across other sectors including transportation, entertainment and hospitality could present opportunities for cautious lending.
However, consumer credit growth is likely to slow on higher default fears, potentially reflects weaker disposable income and the increasing likelihood of job losses.
“We acknowledge the threat posed by the COVID-19 induced macro weaknesses, as well as the fluctuations in the global market and financing conditions to Nigerian banks, and expect these risks to reflect in banks’ NPL ratios through 2020”, Cardinalstone explained.
Nonetheless, the firm said it holds the view that a reversion to 2009 when NPL hit 37.3% or 2017 when NPL berthed at 14.8% could be far-fetched.
“Our stance is premised on the CBN’s regulatory forbearance for banks to restructure potentially affected loans.
“Over 32.9% of sector loans have been identified for potential restructuring, which, if granted by the CBN, would ease the NPL pressure”, analysts stated.
The firm said while Oil & Gas loans which accounted for 26.6% of industry loans have elicited the most concern due to falling oil prices, analysts argue that a considerable amount of banks’ exposures appear to be restructured facilities, a fallout of the 2014—2016 crises, and thus expect the repercussions to be less severe than initially feared.
This view is also buttressed by indications that of banks’ total requests for restructured facilities, Manufacturing and General Commerce loans constitute the bulk, according to the monetary authorities.
Nigerian Banks Prudential Ratios to Be Severely Impacted in 2020
