Nigerian Banks In Trouble, Face Global Risk Transmission Despite Oil Boost
Nigerian banks’ operating environments could deteriorate in 2022–2023 as adverse global economic conditions feed through to the local economy, Fitch Ratings has said in a new report.
According to the rating agency, soaring inflation led the Central Bank of Nigeria (CBN) to raise its benchmark rate by 150 basis points (1.5%) on May 24th, 2022 to 13%, and the pressures on banks’ profitability and asset quality will be higher than we had initially expected for 2022.
However, the sharp rise in oil prices this year will mitigate the economic impact of the global risks, and we do not expect Nigeria’s banking sector to experience a material shock.
It explained that high inflation and a potential economic slowdown will put pressure on borrowers, to the detriment of the banks’ asset quality, adding that “inflationary concerns led the CBN to raise its benchmark rate by 150bp to 13% on May 24th, 2022, the first increase since 2016.
“We expect interest rates to increase further given accelerating inflation and tighter global financial conditions. This should support the banks’ net interest margins, which have been dented by low rates in recent years.”
“As a major oil exporter, Nigeria should see a boost to its economy and FX reserves from the current very high oil prices. However, low production and high import costs for refined products, and the need to subsidise households and businesses, will limit the benefits”, it added.
For banks, Fitch Ratings said the most pronounced benefit of higher oil prices is decreased pressure on asset quality.
“Oil prices and Nigerian banks’ non-performing loan ratios have been closely inversely correlated in the past, reflecting the outsized exposure to the oil and gas sector in loan books, the Nigerian economy’s high dependence on oil revenues, and the spill-over effects from oil to non-oil sectors”, it added.
There are six Nigerian banks with subsidiaries in Ghana. They include Access Bank, Zenith Bank, UBA, FBN, GT Bank and First Atlantic Bank.