Nigerian Banks to Witness Acute Funding Challenges

By Adedapo Adesanya

A global rating agency, Moody’s, has warned that Nigerian banks will face a fresh round of foreign currency liquidity pressures due to current global realities.

In a new report, the agency said the forex liquidity pressures will arise due to low oil prices, volatile foreign inflows and lower remittances in the face of the coronavirus pandemic.

This will lead to a similar situation lenders witnessed during the previous oil crisis in 2016, in which prices of the commodity plunged, leading Nigeria to an economic recession.

According to Mr Peter Mushangwe, a banking analyst at Moody’s, “Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016,”

The report noted that Moody’s moderate scenario where foreign currency deposits decline by 20 percent while loans remain constant, would increase rated banks’ funding gap to N1.5 trillion ($3.8 billion), and to N1.9 trillion ($5.0 billion) under a severe-case scenario of 35 percent foreign currency deposit contraction, creating acute funding challenges.

Moody’s said Nigerian banks have bolstered their dollar deposit bases and liquid assets since 2016, but that scenario analysis still highlights vulnerabilities.

The agency noted that oil and gas exports contribute about 90 percent of Nigeria’s foreign currency revenue, whereas crude oil now trades around $40 a barrel, substantially lower than the average price of $65 in 2019 and $72 in 2018.

Moody’s gave an oil forecasts between the range of $35 – $45 over the next 12 to 18 months, stressing that even prices within that range, or lower, in the second half of the year would lead to renewed dollar shortages at the banks.

According to the report, Moody’s-rated Nigerian banks reduced their foreign currency funding gap to a combined N354 billion ($984 million) in 2019 from N1.436 trillion ($5.5 billion) in 2016.

It added, “The ratio of foreign-currency loans to foreign-currency deposits at Moody’s rated banks dropped to 106 percent at the end of 2019 from 135 percent in 2016 as banks cut back on dollar loans while building up their dollar deposits”.

It also noted that the smaller funding gap will enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs.

However, Moody’s said that in the event of foreign currency deposits contracting by 20 percent or more, banks’ funding gaps will be significant.