Central Bank of Nigeria’s (CBN) forbearance that allows loan restructure is billed to end in the year in line with global practice.
As a result, the country’s deposit money banks non-performing loans has been projected to jump double-digit in the financial year 2021.
Due to the COVID-19 pandemic-induced economic stress, the apex bank allowed leeway for banks to restructure customers loans in order not to overrun their books.
Banks with higher exposures to oil and gas and other vulnerable segments including commerce and retail restructure large asset.
Standard & Poor’s global credit ratings (S&P) analysts in an industry report say the expectation that growth prospect will in the banking sector be subdued in 2021 as signs of domestic economic recovery are still elusive.
It noted that Nigeria’ economic growth has been below the strong averages achieved prior to the 2015-2016 oil price shock.
The ratings affirmatively believes that economic setbacks will persist despite more sustained oil prices, which S&P analysts now project at $60 a barrel in 2021 and 2022, and because the vaccine rollout is in early stages.
“We expect gross domestic product (GDP) growth to average about 2% a year through to 2023 after a contraction in 2020”, S&P analysts concluded. Saying that Nigeria’s weak economic fundamentals will constrain private-sector credit growth, estimated at 5% through 2022.
This is despite the 65% minimum loan to deposit ratio introduced in 2019.
The ratings specifically hinted that the banking sector is exposed to short credit cycles and high credit risks because of Nigeria’s reliance on oil and its sensitivity to currency depreciation and high inflation.
It noted that the pandemic’s effects have been partially mitigated by the 2016 restructuring, which saw banks use lower break-even prices and a prefunded debt service reserve account that provides three to six months of payment buffers during times of stress.
Nonetheless, S&P said restructured loans in the banking sector have jumped to 20%-25% in 2020 from about 10% in 2019, as a result of the pandemic.
However, NPLs have only increased marginally in 2020, leading to a ratio of 6.1% because of regulatory forbearance measures, against a minimum regulatory limit of 5%.
“We expect NPLs to rise to double-digit levels in 2021 as regulatory measures end. We forecast credit losses to range 2.0%-2.5% in 2021-2022, compared with an estimated 1.5% in 2020.
The Nigerian banking sector has been operating under difficult economic and regulatory circumstances since the 2016 crisis. The restrictive foreign exchange regime that ensued has undermine banks’ ability to manage their FX liquidity and forced them to reduce their FX exposures.
CBN limited the extent of its foreign exchange sales into the Nigerian Autonomous Foreign Exchange Fixing Mechanism, or NAFEX window, which in turn suffered from a scarcity of sellers, creating at times a backlog in FX supply.
Most banks have gradually overcome their short-term liquidity difficulties following the introduction of the NAFEX window in April 2017, while external debt will likely remain manageable at approximately 13% of total loans in 2021, according to S&P’s forecasts.
It observed that the FX liquidity has had a knock-on effect on banks’ earnings, given that CBN has been managing naira liquidity tightly.
In 2019, the apex bank imposed a minimum Cash Reserve Requirement (CRR) of 27.5% in order to curb FX demand and penalizes banks reporting a loan-to-deposit ratio below the minimum by withholding central bank reserves equivalent to 50% of the lending shortfall.
The recent move to a single FX rate is unlikely to accelerate the normalisation of the minimum CRR, S&P analysts added.
In addition, the ratings said earnings growth is likely to slow down because of higher credit impairments in 2021, and AMCON levy (to fund bank clean-ups).
CBN created AMCON in 2010 to help clean up asset quality in the banking system over the 10 years following the 2009 financial crisis, but it is likely to remain for a longer period.
“The levy accounts for about one-third of banks’ cost bases, and we now see it as a form of market distortion that will likely persist”, S&P said while noting that banks funding profile will continue to support net interest margin despite the interest cuts in 2020.
“Most Nigerian banks are largely funded by low-cost customer deposits, but lower-tier banks rely on wholesale funding which underpins higher cost of funding.
“We expect the sector’s average return on equity to fall to about 16% in 2021 from almost 19% in 2020, while return on assets will slide below 2%.
“Although banks earnings will continue to suffer, we don’t expect rated Nigerian banks to breach minimum regulatory capital ratios as a result of the recent naira devaluation”, S&P analysts said.
