S&P Highlights Key Risks For Nigerian Banks in 2024

January 22, 2024
Nigerian Banks

By Dipo Olowookere

One of the major global credit rating organisations, S&P Global Ratings, has said despite the tough operating environment and policies, Nigerian banks can remain strong and absorb the shocks.

In a note made available to Business Post on Monday, the agency, however, emphasised that there is the “possibility of individual small banks breaching their minimum regulatory requirements,” especially those in the tier-2 and tier-3 categories.

But it stressed that the tier-1 lenders, despite the macroeconomic pressures, “including a weakening Nigerian naira,” have positive net open position and strong earnings that will help them to “mitigate the negative impact of currency movements on [their] capital adequacy ratios.”

In the report, the firm noted that the capital requirements of Nigerian banks will change, especially because the currency depreciation will result in higher risk-weighted assets, leading to a breach of the single obligor limit for some of them, which will reduce their capital adequacy ratios.

Recall that last year, the new Governor of the Central Bank of Nigeria (CBN), Mr Yemi Cardoso, hinted that the capital base of the banking sector would be raised amid the weakening of the Naira.

For S&P, “We think that banks’ regulatory capitalization is less at risk today than in 2016, but we do not exclude pressure on individual banks’ capitalization in the case of a prolonged weakening of the naira.”

“Naira depreciation has led to a strengthening of capitalisation for most top-tier banks. Capital buffers averaged 9 per cent for top-tier banks, compared with about 6.8 per cent prior to the devaluation,” it added.

However, it warned that Nigerian banks face some risks in the year, especially further increases in financing costs due to the prolonged stay of Nigeria on the global anti-money laundering and terrorist financing watchdog’s grey list.

It also said the country’s financial institutions could experience weaker asset quality this year as “higher interest rates and inflation will likely affect small businesses and households.”

“We expect impairment charges to rise to about 3.5 per cent in 2023 and to moderate in 2024 to about 2.0 per cent.

“This reflects currency movements and tight macroeconomic conditions, with negative implications for capitalisation,” it further said.

Dipo Olowookere

Dipo Olowookere is a journalist based in Nigeria that has passion for reporting business news stories. At his leisure time, he watches football and supports 3SC of Ibadan.

Mr Olowookere can be reached via [email protected]

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