Nigerian Banks Will Suffer Higher Credit Losses Of 3.5-4% In 2017 – S&P Global Ratings

The Nigerian banking sector faces another difficult year in 2017, according to an S&P Global Ratings report published on RatingsDirect titled Nigeria Bank Outlook 2017: Economic And Currency Concerns Will Fuel Weaker Capital And Higher Credit Losses.
S&P forecast that the 10 banks we rate in Nigeria will suffer increased credit losses of 3.5 per cent – 4.0 per cent in 2017 in aggregate, after an anticipated three per cent in 2016.
“Continued low oil prices, devaluation of the naira, a shortage of US dollars, and the 2016 economic recession are battering banks’ domestic balance sheets,” said S&P Global Ratings credit analyst Matthew Pirnie.
“We believe domestic banks will take shelter by attempting to preserve liquidity and capitalisation through slowing their growth and cutting costs, but the likelihood of severe banking sector stress is increasing.”
The major risk facing the banks is the ongoing shortage of US dollars, which has caused delays in the payment of some off-balance-sheet facilities. Positively, the Central Bank of Nigeria has recently started to provide additional US dollars to the banks and to private individuals at a rate up to 20 per cent higher than the official rate. However, in the event of official devaluation, banks’ asset quality and capitalisation would be further constrained. We believe at least three banks are within 150 basis points of their minimum capital adequacy ratio due to the 2016 devaluation of the naira and weak earnings, and further losses or devaluation could trigger an element of regulatory forbearance within the sector.
“We anticipate that a few banks will brace themselves for this year’s challenges by either actively shrinking their balance sheets or seeking capital injections in 2017, which could prove difficult in the current market and economic environment,” continued Mr. Pirnie.
As a result, S&P’s outlook on the banks it rates, representing approximately one-half of the banking system assets is negative, despite their already low ratings. S&P nevertheless see significant differences between the top-tier banks and the middle and lower tiers. The four strongest banks dominate the better-quality corporate relationships and have stronger capital and cheaper, more stable funding positions.

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