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Standard & Poor rates Nigeria, banking industry as high risk

By Omoh Gabriel
LAGOS — Standard & Poor’s Ratings Services, Wednesday, thumbed down Nigeria economy and the banking reforms, saying that Nigeria and the banking industry are a very high risk. It said it classified Nigeria as “very high risk” because of significant market distortions or low industry stability.

The rating agency said it was, however, revising its Banking Industry Country Risk Assessment, BICRA, on Nigeria to group ‘8’ from ‘9’. It is also revising the economic risk score to ‘8’ from ‘9’ and assigning an industry risk score of ‘7’ thus placing the country in the same category with Georgia, Lebanon, Latvia, Argentina, Bolivia, and Uruguay.

The report said: “We have reviewed the banking sector of the Federal Republic of Nigeria (B+/Stable/B) in light of our updated BICRA methodology. Our criteria define the BICRA framework as one “designed to evaluate and compare global banking systems.”

“BICRA analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. BICRA is scored on a scale from 1 to 10, ranging from the lowest-risk banking systems (group 1) to the highest-risk (group 10). Other countries in BICRA group ‘8’ include Argentina, Tunisia, Lebanon, and Kazakhstan.

“Our economic risk score of ‘8’ reflects our opinion that Nigeria has a “very high risk” in “economic resilience,” a “high risk” in terms of “economic imbalances,” and a “very high risk” in “credit risk in the economy,” as our criteria define those terms.

High political risk

“Nigeria is a country with high political risk, low GDP per capita, and large infrastructure needs, all factors that contribute to a volatile and risky operating environment for banks. Nigeria has large natural resources, low government debt, and high economic growth potential, which partly mitigate these risks.

The slow recovery of the domestic economy has slowed credit growth and kept the stock market muted, limiting economic imbalances. In our view, credit risk in the economy is very high because of Nigeria’s low wealth levels, the banks’ track record of relaxed underwriting standards, industry concentrations, and a weak payment culture.”

“Nevertheless, financial support from the Asset Management Corporation of Nigeria, (AMCON; not rated) helped reduce credit risk. AMCON was created to stabilise the financial system by buying up non-performing loans from Nigerian banks. It bought approximately $9.5 billion of non-performing loans since it was created in mid-2010.

“Our industry risk score of ‘7’ for Nigeria is based on our opinion that the country faces “very high risk” in its “institutional framework” and “competitive dynamics,” and “intermediate risk” in “systemwide funding,” as our criteria define those terms.

During the banking crises of 2009, numerous banks failed. The Central Bank of Nigeria’s subsequent actions as banking supervisor has been positive, but its regulatory track record before 2009 was weak. Our opinion on institutional framework incorporates this track record and the prevalence of poor corporate governance in Nigeria’s banks. During and after the crisis, the regulator supported the system by offering a full inter-bank guarantee and creating AMCON. We consider these actions to be positive for the industry.

As a result of the Central Bank’s actions, 10 banks were “quasi-nationalized” in 2009. The sector is now seeing a succession of mergers and acquisitions, which will undoubtedly affect the competitive dynamics of the sector. We view the funding profile of the industry as relatively stable. It is mainly based on short-term customer deposits, although the potential for volatility thus created is somewhat offset by good liquidity in the banking sector.

@We classify the Nigerian government as “supportive” toward its domestic banking sector. Our opinion balances the strong extraordinary support provided by the authorities, including through AMCON, against the potential political instabilities that could lower the predictability of support in the future.

According to the report negative developments in the global economy could exert pressure on Sub-Saharan Africa (SSA) sovereigns over the coming months “This is although SSA economies have been expanding since the global economic downturn of 2008/2009.

“A sharp correction of global commodity prices would negatively affect those countries that rely heavily on commodity exports and commodity-related fiscal revenue,” said Standard & poor’s credit analyst Christian Esters. Current account balances could also be affected if remittance inflows falter, although this had only mild effects on our rated sovereigns in Africa during the last downturn, the report says.

For the region as a whole, a drop in global risk appetite could also erode the confidence that foreign investors have shown in SSA markets since 2009. Budgetary pressures in Europe and the U.S. could also slow down aid flows, which are critical to sustain public investment in many countries, the report states.

“So far, solid economic growth, ongoing donor assistance, and the improvements made in fiscal management over the past few years have limited negative rating pressures on SSA sovereigns,” said Mr. Esters. “However, monetary policy challenges have increased in some countries in the region, where we envisage high inflation rates and exchange rate fluctuations.”

Nevertheless, since 11 of the 15 sovereigns we rate in SSA reside in the ‘B’ category, this limits the potential for downgrades because such a rating already factors in a high degree of vulnerability.

 


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