Nigeria’s banks are expected to remain profitable in 2016, even though they are likely to face more challenges as interest rates continue to rise, says Fitch ratings.
The central bank’s benchmark interest rates, which hovered around six per cent from 2001 to 2011, have risen steeply. The latest increase came on July 26, bringing rates up to 14 per cent in a move to curb inflation and strengthen the naira.
“The rate increase will also lead to higher funding costs for the banks. This and the switch away from loans and into fixed-income government bonds are likely to squeeze Nigerian bank net interest margins. We also expect operating costs and loan impairment charges to rise but still expect Nigerian banks to remain profitable in 2016,” the agency stated.
Fitch, an international rating agency, in a statement over the weekend said rising rates are likely to put additional pressure on banks’ asset quality, adding that almost all lending is extended at floating rates and banks should be able to reprice their loans quite quickly but borrowers will face more difficulties in servicing their debts.
According to Fitch, impaired loans are already high in the Nigerian banking sector, where average non-performing loan ratios reached 6.2 per cent at end-March 2016, partly reflecting the impact of currency depreciation on businesses as well as higher oil-related problem loans at some banks.
It further said it is expected that loan growth (excluding foreign-exchange translation effects) will slow during second half 2016 (2H16) and into 2017. Banks have already tightened underwriting standards as economic conditions in the country worsen. GDP contracted by 0.4 per cent year on year in quarter one (1Q16) and Fitch forecast Gross Domestic Product (GDP) growth to fall to 1.5 per cent in 2016 (2015: growth of 2.7 per cent).
“With rising rates, excess liquidity in the banking sector is, in our opinion, likely to flow into additional holdings of higher-yielding government debt.”
“Government securities represent about 16 per cent of total Nigerian banking sector assets and 10-year senior bonds yield about 15.3 per cent. Despite the rate rise, real interest rates remain negative when considering inflation, which reached 16.5 per cent in June 2016.
Nevertheless, for the domestic banks government bonds represent low-risk, low capital intensive investments. Lending, particularly in foreign currency, carries higher risks,’ the agency’s report read in part.
Fitch downgraded Nigeria’s sovereign rating to ‘B+’ in June and various bank ratings were downgraded in July. The challenging and volatile operating environment in Nigeria, as well as such factors as the banks’ financial profiles, mean Nigerian bank standalone Viability Ratings (VR) are in the highly speculative ‘b’ category it said. Nigerian bank VRs are sensitive to a prolonged economic downturn and depressed oil prices, and to materially weaker asset quality.