Nigeria’s banks are expected to take a big hit to revenues and face rising borrowing costs this year as Central Bank of Nigeria (CBN)measures to support the nation’s currency squeeze lenders already hit by fallout from coronavirus and the oil price shock, analysts say.
Nigerian financial system a mainstay for equity and fixed income frontier market investors – have learned to navigate challenges in a country struggling with dollar shortages and multiple exchange rates. But the prospect of anaemic growth, dwindling oil revenues, declining remittances and dollar shortages exacerbated by the apex bank’s latest action aimed at curbing naira liquidity and currency speculation are putting pressure on lending by banks and the quality of existing assets.
The CBN has sucked as much as N900 billion out of the local banking system since raising the cash reserve ratio (CRR) by 5 per cent to 27.5 per cent in January, according to analysts’ calculations.
“General sentiment in the markets is that CRR debits are carried out quite close to FX auctions to prevent the banks from presenting large ticket FX demands at auctions,” said Nkemdilim Nwadialor at Tellimer Capital.
Those debits also hamper wider lending, going against central bank measures of lowering banks’ loan to deposit ratios, she said. Central bank data showed credit to the private sector in April dropped by nearly two-thirds from end-2019.
“Banks are dealing with slow growth, fall in lending, a lack of forex in the market and asset quality issues,” said Mahin Dissanayake, senior director EMEA bank ratings at Fitch. He expects banks’ revenues to drop at least 20 per cent this year, though he did not expect any to make a loss.
Some banks have already indicated they expect a hit. In April, mid-tier lender Fidelity Bank warned 2020 profits would drop by 15 per cent.
Bankers said lenders were relying on existing customers to weather the storm as new lending looked risky with the economy expected to tip back into recession.
Fitch predicts impaired loan ratios will rise sharply in 2020 with Nigerian banks the most exposed to stress in the oil sector compared to their peers in emerging markets elsewhere.
Nwadialor at Tellimer expected a “significant pick-up” of non-performing loan ratios from 6.6 per cent in the first quarter to an average of 10 per cent for the full year – double the central bank’s benchmark. Some banks have already announced plans to tackle this. Mid-tier lender FCMB plans to complete a restructuring of half its loan book at the end of April. A central bank policy maker predicted last month that banks would restructure over a third of loans.