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Nigerian Banks’ Earnings, NPL Risk Still Under Pressure—Moody’s

By Modupe Gbadeyanka

Renowned global credit rating company, Moody’s, has warned that the earnings and Non-Performing Loans (NPLs) of banks operating in Nigeria are still under pressure despite having outlook as an improving operating environment.

In its latest outlook for the nation’s banking sector, Moody’s said, “Nigerian banks’ profitability will nevertheless decline on account of lower yields on government securities, as well as a likely reduction in income from derivatives.”

In the report released yesterday, the rating agency said explained that outlook for the Nigerian banking system remains stable as their foreign currency liquidity risks moderate due to rising oil prices and a more liberal foreign exchange policy.

Business Post reports that the yields on Treasury bills (T-bills) have been declining in recent months as major economic indicators turn positive. The yields have dropped from over 18 percent in the last one year to 10.60 percent as at Wednesday.

Likewise, returns on Federal Government of Nigeria (FGN) Bonds have also nosedived to around 13 percent from over 14 percent previously.

Analysts explained that as the economy recovers and attracts more confidence of foreign investors, earnings on government securities drop.

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This is supported by recovering global oil prices and a more liberal foreign exchange market.

However, Moody’s expects banks’ earnings to come under pressure, capital metrics to decline marginally, and asset quality to remain weak between the next 12-18 months, resulting  from declining yields on government securities, the introduction of new IFRS 9 accounting standards, and increase in NPLs of the banks.

“Operating conditions for the Nigeria’s banks will continue to gradually improve over the next 12 to 18 months, but remain challenging,” the Vice President and Senior Credit Officer at Moody’s, Mr Akin Majekodunmi, disclosed at a conference in Lagos.

“Nigeria’s growth prospects remain vulnerable to global oil prices, as crude oil will remain the nation’s largest export commodity and its main generator of foreign currency for the foreseeable future,” he added.

However, Moody’s expects the pressure on the Nigerian banks’ profitability to be offset partially by a recovery in loan growth and transaction income from the expansion of digital platforms, and the ease of foreign currency shortages.

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Foreign currency loans accounted for 40.7 percent of the system wide loan book at the end of the third quarter of 2017, down from 50 percent at year-end 2016.

A significant proportion, some 10 percent to 20 percent, has been dispersed to borrowers with little or no foreign currency income.

These borrowers are vulnerable to fluctuations in the naira/dollar exchange rate as a depreciation of the naira reduces their repayment capacity, Moody’s said.

Moody’s conducted a scenario analysis to gauge the solvency of banks under both a base-case and a low-probability highly stressed scenario that is roughly equivalent to a 1-in-25 year event.

“Under our base-case (or most likely) scenario, we expect the system-wide capital ratio to remain roughly stable over a two-year horizon. This is driven by an increase in loan losses, due to an increase in system-wide non-performing loans and in risk-weighted assets, driven by loan growth.

“This impact would be offset by pre-provision income leaving the capital ratio virtually unchanged at 17.0%,” Moody’s said.

In the report titled ‘Banking System Outlook: Nigeria,’ Moody’s forecasts a recovery in real Gross Domestic Product (GDP) growth over the next two years, up from 0.8 percent last year, helping lending growth rise to around 10 percent after a 15.4 percent contraction in 2017.

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On the weakening of asset risk, Moody’s expects only a moderate deterioration in loan performance given the lagging effect of subdued economic growth – continued asset risk vulnerability from banks’ large exposures to the oil and gas sector and foreign currency borrowers in general capital weakening .

The banks’ capital levels are projected by the rating body to decline moderately on account of the introduction of IFRS 9. While it expects provisioning costs to be absorbed by pre-provision income.

On the stability of funding and liquidity, the Banks are projected to continue to benefit from stable deposit funding and solid liquidity buffers in local currency.

The agency also expects banking system income to be supported by both a recovery in loan growth to 10 percent over 2018 and an increase in noninterest income/transactional income through the promotion of e-banking platforms.

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Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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