Fitch says financial risks persist in banking industry

Fitch, an international ratings agency, on Wednesday said that financial risks still persisted in the banking industry in spite of good financial results for 2016 posted by banks.

The agency said in a report on Nigerian banks on Wednesday and posted on its website that significant financial risks persisted beyond reported figures.

It said that the banks’ healthy 2016 net income was lifted by large one-off revaluation gains after the country allowed its currency to devalue in June.

The rating agency also said that banks also made higher dollar core income in naira terms and booked sizeable foreign-currency trading income, which offset rising impairment charges.

It noted that a substantial part of earnings were non-recurring and would be difficult to repeat but said that banks’ performance ratios improved in the year.

“Sector impaired loan ratios increased sharply but this was expected, given the extent of Nigeria’s macro-economic challenges.

“Asset-quality metrics would have been even worse if not for high levels of restructured loans, particularly to the troubled oil sector.

“Low reserve coverage and high levels of FC lending add to our concerns about the banks’ long-term financial health. Capital buffers continue to be weak despite relatively high reported capital adequacy ratios (CARs).

“We maintain that ratios are vulnerable to even modest shocks for some,” it said.

According to Fitch, year-end CARs have declined due to the twin pressures of inflated risk-weighted assets due to the revaluation of dollar assets and rising impairment charges.

It said that was partially offset by strong retained earnings, which benefited from the revaluation gains.

Fitch also said that the banks’ funding and liquidity risks continued to be high.

“Loans/deposits ratios have been rising but are not excessive. The primary concern relates to FC liquidity, which remains tight despite the authorities’ attempts to normalise the foreign-exchange interbank market.

“For 2017, we believe there will be a slight easing on the banks’ operating environment reflecting some early-stage improvements on the macro-economic front.

“We expect banks to remain profitable despite still modest credit growth and forecast further asset-quality deterioration, but at a slower pace.”