By Omoh Gabriel in Washington
Fitch Ratings Agency yesterday in London said in a new special report that Nigerian banks are performing well despite the twin hurdles of tight monetary policy actions and new banking rules.
The rating Agency however warned that Nigerian banks are now seeing some asset quality deterioration with rising absolute non performing loans, reflecting fast loan growth since 2011.
The report said that a sharp decline in capitalisation could be negative for bank ratings. It also said that government (Sovereign) support drives most Nigerian banks’ Issuer Default Ratings. It said “Of the nine Nigerian banks rated by Fitch on the international scale, six have Long-Term IDRs driven by potential state support. They are First Bank of Nigeria, United Bank for Africa, Diamond Bank, Union Bank, Fidelity Bank and First City Monument Bank.
“While the willingness of the Nigerian authorities to support domestic banks continues to be high – as demonstrated during and after the 2009 banking crisis – its ability is limited by the sovereign rating of ‘BB-‘.
“Three banks, Zenith Bank, Guaranty Trust bank and Access Bank have IDRs driven by their intrinsic strengths as defined by the Viability Rating (VR). All Nigerian banks have VRs in the ‘b’ range, mainly due to the high influence of the operating environment on their ratings. We believe the domestic operating environment can be challenging and sometimes volatile, therefore effectively capping the Nigerian banks’ VRs. Other factors constraining VRs include weak governance structures, developing company profiles (particularly for the smaller banks) and recovering financial metrics. Zenith Bank and Guaranty Trust Bank have the highest VRs of ‘b+’ due to their ability to perform well through the cycle”.
It said that most banks’ non-performing loans ratios remain below the 5 per cent prescribed by the CBN but view this as unsustainable in the long-run. Very high loan concentrations by borrower and sector expose banks, particularly the smaller banks, to significant event risk. Banks Fitch said are also seeing moderate liquidity pressure with rising loans/deposit ratios.
Mahin Dissanayake, Director in Fitch’s EMEA Financial Institutions team, commenting on the performance of Nigeria banks said “This is mostly supported by continuing robust economic growth. Nevertheless, we expect bank performance and growth to moderate over the next 18 months due to Central Bank of Nigeria actions aimed at protecting the economy and the banking system,”
The CBN’s stance also shifted towards protecting the consumer through its revised rules on banking charges introduced in 2013. All these moves, however, led to weaker profitability and stemmed credit growth in the first half of 2014 – a trend that is likely to continue into 2015.
All Fitch-rated Nigerian banks were profitable in 2013 and first half of 2014 but saw performance slip. There were a few outliers and these were typically the smaller banks, which outperformed the sector.
Earnings pressure the report said was exacerbated by high operating costs at most banks due to a higher AMCON levy and network expansion strategies. Banks are now seeing some asset quality deterioration with rising absolute NPLs, reflecting fast loan growth since 2011. Most banks’ NPL ratios remain below the 5% prescribed by the CBN but Fitch views this as unsustainable in the long-run. Very high loan concentrations by borrower and sector expose banks, particularly the smaller banks, to significant event risk. Banks are also seeing moderate liquidity pressure with rising loans/deposit ratios. In response, the banks’ large customer deposit bases are continuing to expand on strong GDP growth and increasing banking penetration.
The focus is on raising low-cost retail deposits to strengthen funding profiles, particularly following the cash reserve requirement hikes on public sector deposits. Several banks have successfully tapped the euro bond market to raise longer-term dollar funding to meet the strong demand for dollar denominated loans from major corporates, although it exposes the banks to foreign exchange-related risks.
The report said “We expect bank capitalisation to come under pressure due to Basel II implementation in 2014 and proposed new regulatory capital computation rules. As a result, Fitch believes regulatory total capital adequacy ratios could fall between 200bps-300bps this year.
Most Fitch-rated banks report Fitch core capital (FCC) and Basel I regulatory capital ratios in excess of 20 per cent which is considered a comfortable level given the risks inherent in Nigeria.