Low Oil Prices Negative for Nigerian Banks, Moody’s Says

Banks will come under pressure from a drop in foreign currency deposits from oil exporters and “the Central Bank of Nigeria may limit the amount of dollars it allocates to banks’ clients, harming their business opportunities,” the credit rating company said.

Oil prices collapsed this week after disagreement between the world’s biggest exporters on how to respond to a drop in demand as global economic growth slows from coronavirus spread.

“If oil prices remain at current levels for the next two quarters, we expect Nigerian banks’ problem-loan ratios to rise beyond our initial expectation of 6%-8%”, Moody’s said.

Banks estimate the average break-even price for most obligors in the upstream sector at between $35 and $45 per barrel. Substantial exposure to the oil and gas industry, which is at about 28% of total loan books as of third quarter of last year, may weaken from falling oil prices, the ratings agency said.

Strong corporate banking franchises will help tier-1 lenders such as Access Bank Plc, First Bank of Nigeria Plc, Zenith Bank Plc, Guaranty Trust Bank Plc and United Bank for Africa Plc to withstand funding stress, while mid-size and small banks may struggle to get foreign exchange from the interbank market and clients, according to Moody’s.

“Tight dollar liquidity will also weaken investor confidence, making it harder and more expensive for banks to raise non-deposit foreign currency funding outside Nigeria.” Banks with high oil and gas loans will be more affected than others.

A weaker naira and investor’s risk aversion will add to banks asset quality pressure given high foreign currency loans exposure. Nigeria biggest lender by market value, Guaranty Trust has foreign exchange lending to total loan book ratio as high as 58%, with Union bank at 49% and Fidelity 43%.

The naira weakened to 386 naira to the dollar as at 6.54 p.m local time on Thursday, its highest level since March 1994. Banking index dropped 8.5% at close in Lagos.