Nigerian banks to remain resilient despite elevated credit risks from deteriorating operating environment — Moody’s

Lagos, Nigeria, Capital Markets in Africa — Moody’s Investors Service expects Nigerian banks’ non-performing loans to rise in 2016, driven by the deteriorating repayment capacity of borrowers in the oil and gas sector, although their profitability will remain sufficient to absorb related provisioning needs, as indicated in the report, “Banking System Overview: Nigeria” written by Moody’s analysts Akintunde Majekodunmi and Peter Mushangwe.

As a reflection of lower oil prices that will continue to constrain fiscal revenue and public expenditure, Moody’s expects Nigeria’s real GDP growth to decelerate to 3.5% in 2015 before recovering to 4.9% next year, from over 6% in 2014. 

“Over the next two years, we expect Nigerian banking system problem loans to rise above 5%, but remain below 10%, owing to the disproportionate exposure to the oil and gas sector, the high level of unseasoned loan stock as a result of strong loan growth in recent years, and the high level of foreign currency denominated loans,” says Akintunde Majekodunmi, a Vice President — Senior Analyst at Moody’s and a co-author of the report. “These loan portfolio characteristics are being pressured by Nigeria’s challenging macroeconomic environment.”

However, despite pressures on profitability over this period, stemming from slower loan growth, Moody’s still expects that bank earnings will be sufficient to absorb increased credit costs. Moreover, Moody’s also expects banks to maintain their solid capital and liquidity buffers over this challenging period.

The resilience of the Nigerian banking system also stems from continued improvements to the regulatory and supervisory environment, as well as its predominantly deposit funded liability structures and low loan to deposit ratios.

“In the long-term, we also expect that retail lending will create enormous opportunities for Nigerian banks, given the population size and low penetration in the segment,” said Peter Mushangwe, a Moody’s Associate Analyst and co-author of the report.