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Risks persist in Nigerian banks, Fitch warns

…As Moody’s maintains stable outlook

By Babajide Komolafe

Fitch Ratings, yesterday, said Nigerian banks are still exposed to significant risks that undermine their ability to repeat the good financial performance recorded in 2016.

Meanwhile, Moody’s Investors Services said it was maintaining its stable outlook on the Nigerian banking system in spite of light loan risks.

Fitch comments were contained in a report released, yesterday entitled, “Nigerian banks post good results but risks persist.”

Similarly, Moody’s comments were contained in a report, entitled, “Banking System Outlook: Nigeria,”

The Fitch report stated: “Nigerian banks posted good financial results for 2016, despite turbulent operating conditions, but Fitch Ratings believes that significant financial risks persist beyond reported figures. The banks’ healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June.

“The banks also made higher US dollar core income (in naira terms) and booked sizeable foreign-currency (FC) trading income, which offset rising impairment charges. While the banks’ performance ratios improved in the year, we note that a substantial part of earnings were non-recurring and will be difficult to repeat.

Moody’s report

Moody’s in its report, stated: “Moody’s Investors Service is maintaining its stable outlook on the Nigerian banking system, reflecting the rating agency’s view that acute foreign-currency shortages will gradually ease, though loan risks will remain high.

The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Nigeria over the next 12-18 months.

“With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our outlook period,” says Akin Majekodunmi, Vice President and Senior Analyst at Moody’s.

“However, we expect asset quality to worsen slightly over the outlook period, as historically low oil prices, currency depreciation and economic contraction experienced in 2016 continue to generate new nonperforming loans in 2017.”

The rating agency expects Nigeria to see real GDP growth of 2.5 per cent in 2017 and 4 per cent in 2018, after a 1.5 per cent contraction last year, as noted in March 2017.

The revival will be supported by government measures to expand non-oil sectors and its commitment to fund large infrastructure projects, as well as by a partial rebound in global oil prices from lows last year.

Risks to asset quality are likely to remain high, with nonperforming loans (NPLs) likely to rise to between 14-16 per cent from 14 per cent at end-2016. They should, however, reach a peak as write-offs, loan restructurings, and the strengthening economy takes effect.

Nigerian banks should have sufficient capital to absorb expected losses, though Moody’s expects system-wide tangible common equity (TCE) to only decline slightly to 14.1 per cent of adjusted risk-weighted assets by year-end 2018 from 14.7 per cent at the end of 2016. The slight shift is primarily due to increased loan-loss provisions and the effect of further expected naira depreciation on the balance of risk-weighted assets denominated in foreign currency.

Moody’s also sees the banks’ loan-loss provisioning weakening their net profitability. The rating agency expects return on assets to decline to around 1 per cent in 2017 from 1.3 per cent at the end of 2016 on account of high provisioning costs at around 3 per cent of gross loans. System-wide pre-provision income will likely remain robust, however, at around 4 per cent of average total assets, supported by high yields on government securities and profits on open foreign currency positions.

Lastly, Moody’s considers there to be a high probability of the Nigerian government supporting banks in case of need, given the significant consequences of a bank collapse to both the payments system and the wider economy.


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