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Banking System Outlook Update

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Tuesday, April 28,
2020 / 6:06 PM / by Moody’s Investors Service / Header Image
Credit: Ecographics

 

We have changed our outlook for Nigeria’s banking
system to negative from stable. This reflects our view that banks will face
weakening loan quality and foreign-currency liquidity challenges as depressed
oil prices and the coronavirus pandemic weigh on Nigeria’s economy. These new
difficulties add to existing headwinds from weak economic growth and rising
regulatory costs. Nigeria’s largest banks, however, will continue to benefit
from a high probability of government support.

Proshare Nigeria Pvt. Ltd.

 

Economic conditions will weaken due to
coronavirus and low oil prices
. We expect low oil
prices and fallout from the coronavirus pandemic to place further pressure on
the Nigerian economy, which was already falling short of growth rates required
to increase per capita income. We expect real GDP to contract by 0.8% in 2020
before expanding by 0.9% in 2021, still below the rate of population growth.
The economy will remain sensitive to oil price movements because a large part
of the country’s foreign-currency earnings are derived from oil exports. We
expect credit growth to slow, mainly as a result of reduced corporate lending,
but facility drawdowns by companies, whose cash flows have tightened, will
likely support short-term loan growth. In addition, the Central Bank of
Nigeria, as part of its response to the coronavirus pandemic, is making funds
available via banks, helping to ease the slowdown in loan growth.

 

Loan quality will deteriorate due to
the challenging economic conditions
.
Weaker economic growth and the collapse of the oil price will lead to a
deterioration in banks’ loan performance. We expect problem loans to rise to
between 8% and 10% of total loans from 6% in December 2019, with risk tilted to
the downside should the depressed oil price persist for more than a year. Loan
restructuring and forbearance will lessen the impact of loan quality deterioration.

 

High levels of corporate loans pose
further asset risk
. Despite the measures
taken by the Nigerian central bank to support the economy, we expect the
creditworthiness of most Nigerian corporate borrowers to weaken. Since
corporate borrowers account for around 90% of banks’ loans, banks’ asset
quality will deteriorate. In addition, Nigerian banks have extended large
volumes of outsized loans to single customers. We believe the top 100 customers
represent more than 40% of total gross loans in the banking sector, leaving the
banks disproportionately vulnerable to defaults by one or a number of
borrowers.

 

Banks’ exposure to the oil and gas industry is substantial, at around
27% of total loans at the end of 2019
. The quality of banks’ oil and gas loan portfolios will further
deteriorate as a majority of these loans were extended to the upstream and
service segments, where borrowers are more sensitive to oil price movements
than downstream. However, a substantial amount of upstream and midstream loans
were restructured to match borrowers’ cash flows during the 2015-16 oil price
slump, and some banks have hedged against a low oil price. Lower oil revenue
for the government could also hurt downstream oil and gas borrowers that
receive federal subsidies, as these payments may be delayed.

 

Nigerian banks’ high exposure to foreign-currency loans will be a
further asset quality pressure point in the event of a naira devaluation
. Some 41% of loans extended by Moody’s-rated Nigerian
banks are denominated in foreign currencies, predominantly dollars. Some of
these borrowers are vulnerable to a devaluation of the naira, as they do not
earn foreign-currency income. A weaker naira would increase their debt
repayments so reducing their repayment capacity. We expect some
foreign-currency loans to be converted into local currency if persistent low
oil prices pressure the naira exchange rate.

Proshare Nigeria Pvt. Ltd.

 

Capital ratios will reduce but remain adequate in our base-case scenario. Nigerian banks’ capital ratios will decline but
remain sufficient to absorb unexpected losses under our baseline scenario. We
expect system-wide tangible common equity (TCE) to decline to 13% of
risk-weighted assets (Moody’s adjusted)1 at year-end 2021 from 14% at the end
of 2019. This is primarily because of higher risk-weighted assets and an
anticipated increase in loan-loss provisioning costs, which will erode the banks’
profitability. In the event of a naira devaluation, banks’ risk-weighted assets
will further increase due to their large volume of foreign-currency denominated
loans. We expect Nigerian banks to counter pressures on capital ratios by
reducing their dividend payouts. In addition, banks have high loanloss reserves
at about 90% of nonperforming loans.

 

Profitability will deteriorate due to strained revenue and rising loan
losses
. We expect Nigerian banks’ profitability
to weaken substantially due to lower lending margins and higher costs, with
return on assets falling to 0.5%-1% in 2020 from about 2.5% at yearend 2019.
Constrained interest income because of limited loan volumes and lower asset
yields, cost pressures from investments in IT, a levy to cover the cost of
banking resolution and higher loan-loss provisions will strain banks’ profits.
We expect provisions to increase to 2.0%-2.5% of gross loans from about 0.5% in
2019 for the Moody’s-rated banks. Nigerian banks’ efficiency will also
deteriorate as costs outpace revenue, raising their cost-to-income ratios.
Nigerian banks were already inefficient compared with other large subSaharan
banking systems, with an average cost-to-income ratio of close to 70%.

 

Local currency funding and liquidity will remain robust, but
foreign-currency liquidity will decline
. Nigerian banks’ local currency liquidity and funding profiles will
remain strong. The banks’ proportion of liquid assets to overall deposits was
high at about 38% in 2019, surpassing the regulatory requirement of 30%.
However, Nigeria has historically been susceptible to outflows of dollar
deposits in times of financial and exchange-rate policy uncertainty or low oil
prices. We expect the growth of foreign-currency deposits, which contribute
about 25% of total deposits, to fall substantially. This will lead to renewed
foreign-currency shortages if low oil prices persist.

 

The likelihood of government support for the largest banks if required
will remain high
. We assume a high
likelihood of government support for the largest, systemically important banks
and a moderate probability for all other banks in the financial system.

 

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

 


Overview of Banking System Outlooks

Banking
system outlooks represent our forward-looking assessment of fundamental credit
conditions that will affect the creditworthiness of banks in a given system
over the next 12-18 months. As such, banking system outlooks provide our view
of how the operating environment for banks, including macroeconomic,
competitive and regulatory trends, will affect asset quality, capital, funding,
liquidity and profitability. Banking system outlooks also consider our
forward-looking view of the systemic support environment for bank creditors.

 

Since
banking system outlooks represent our forward-looking view on credit conditions
that we factor into our bank ratings, a negative (positive) outlook suggests
that negative (positive) rating actions are more likely, on average.

 

Proshare Nigeria Pvt. Ltd.

 

Related News – Rating Agencies on Nigeria

  1. Moody’s Affirms Nigeria’s B2 Ratings, Maintains Negative Outlook
  2. Three Ratings Agencies, Now One Message
  3. Fitch Downgrades Nigeria to ‘B’; Outlook Negative
  4. Nigeria Long-Term Rating Lowered To ”B-” On Weakening External
    Position
  5. Nigeria’s Outlook Revised To Negative On Falling Foreign Exchange
    Reserves
  6. Moody’s Announces Completion of a Periodic Review of Ratings of
    Nigeria
  7. Fitch Revises Outlook on Nigeria to Negative; Affirms at ‘B plus’
  8. Moody’s Changes Nigeria’s Sovereign Ratings Outlook to Negative From
    Stable; Affirms The B2 Ratings
  9. Fitch Affirms Nigeria at ‘B plus’; Outlook Stable

 

Proshare Nigeria Pvt. Ltd.

Related News – Rating Agencies on Banks

  1. Various
    Rating Actions On Nigerian Banks By S and P Following Sovereign Downgrade;
    Outlooks Stable
  2. Nigerian Banks at Severe Risk from Oil Price Slump, Coronavirus
  3. Fitch Downgrades 3 Nigerian Banks to ‘B’, Places All 10 Banks on
    Negative Watch
  4. Outlooks On Six Nigerian Banks Revised To Negative After Same Action
    On Sovereign
  5. Fitch Revises Outlook on UBA Subsidiaries to Negative on Parent
    Action
  6. Fitch Revises Outlook on 4 Nigerian Banks to Negative on Sovereign
    Action
  7. Moody’s
    Affirms Bank of Industry Ratings, Changes Outlook to Negative from Stable
  8. Moody’s
    Affirms Ratings of Nigerian Banks Following Action On The Nigerian
    Government
  9. Fitch
    Affirms Union Bank of Nigeria Plc at ‘B-‘; Outlook Stable
  10. Fitch
    Affirms Stanbic IBTC Bank at ‘AAA(nga)’
  11. Fitch
    Affirms Zenith Bank Plc at ‘B’ plus; Outlook Stable
  12. Fitch
    Affirms Bank of Industry at ‘B’ plus; Outlook Stable
  13. Fitch
    Affirms United Bank for Africa PLC at ‘B’ plus; Outlook Stable
  14. Fitch
    Affirms Access Bank at ‘B’; Stable Outlook
  15. Fitch
    Affirms Guaranty Trust Bank at ‘B’ plus; Stable Outlook
  16. Fitch
    Revises Outlook on FBNH to Stable; Affirms at ‘B-‘
  17. S and P
    Global Ratings Affirmed ETI And Ecobank Nigeria Ltd Ratings; Outlook
    Stable
  18. Fitch Rates
    Access Bank’s Tier 2 Subordinated Debt Final ‘A(nga)’
  19. Fitch
    Affirms Ecobank Transnational Inc at ‘B’; Outlook Stable
  20. Access Bank ‘B and B’ Ratings Affirmed; Outlook Stable

 

Proshare Nigeria Pvt. Ltd.

Related News – Rating Agencies on Selected
Companies and Notes

  1. Moody’s
    Assigns Ratings to Dangote Cement Plc’s DMTN Program and Proposed Series 1
    Notes
  2. Rating Actions Taken On Several Corporate Issuers With Exposure To
    Nigeria
  3. Fitch Affirms Bharti Airtel at ”BBB-”; Off Watch Negative; Outlook
    Stable
  4. Fitch
    Revises IHS’s Outlook to Negative; Affirms at ‘B plus’
  5. Moody’s Affirms Interswitch’s Ratings; Outlook Remains Stable
  6. Moody Changes Ratings for IHS, Seplat and DANGCEM Following Negative
    Rating on Sovereign Outlook
  7. Moody’s Assigns B2 Corporate Family Rating To Interswitch Limited;
    Outlook Stable

 

Proshare Nigeria Pvt. Ltd.

Related News – Rating Agencies on Kaduna
State

  1. Fitch Revises Outlook on Kaduna State to Negative on Sovereign
    Rating Action; Affirms at ‘B’
  2. Fitch Affirms Nigeria’s Kaduna State at ”B”; Outlook Stable – Oct 11,
    2019
  3. Fitch Affirms Nigeria’s Kaduna State at ‘B’; Outlook Stable – May 04, 2018

Proshare Nigeria Pvt. Ltd.

Related News – Rating Agencies on Lagos State

  1. Fitch Downgrades Lagos State to ‘B’ on Sovereign Rating Action;
    Outlook Negative
  2. Fitch Affirms Nigeria’s Lagos State at ‘B plus’; Outlook Stable
  3. Global Credit Rating (GCR) Downgrades Lagos State’s Environmental
    Municipality Note
  4. Fitch Affirms Lagos State at ‘B’ Plus; Outlook Stable
  5. Fitch Affirms Nigeria’s Lagos State at ”B ”; Outlook Negative
Proshare Nigeria Pvt. Ltd.

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