Nigeria’s Banking Sector Systematically Fragile- Fitch

Forecast 2.5% Loan Book Contraction

Global rating agency- Fitch, says Nigeria’s banking industry is among those it described as “the most systematically fragile,” ranking 117th of 121 countries assessed as shown in its Banking Industry Risk Indicator (BIRI) with a score of 12.14%.

The ranking, Fitch noted in its Banking & Financial Services Report Q3 2020, reflects the high risk occasioned by the country’s “weak economic growth in the wake of the 2016 recession and declines in oil sector revenue, alongside a weak regulatory environment and poor living standards.”

This weakness of the Nigerian banking industry, it warned, poses significant risks to the nation’s macro financial stability, despite the somewhat improvement in the structural backdrop of the sector.

“However, the latest score remains below the historical average of 21.72,” it noted further, even as the nation recorded 46.84 Financial component in Q120, reflecting a moderate improvement from a 23.38 in 2017Q4.

This was helped by the stronger asset quality, after the ratio of Non-Performing Loans to Gross Loans dropped from 14.81% in Q417 to 6.03% in Q120, while Bank Credit To GDP ratio fell from 13.36% in Q417 to 11.03% in Q120.

Nigeria, according to the Fitch report, scored a low 24.41 in the Government Finance component in Q120, as against 58.28 in Q414; while Government Debt as a percentage of GDP ballooned from 13.10% in Q414 to 30.19%. Government’s Interest Payments as a percentage of revenue also soared from 8.82% to 27.97% over the same period.

The report also flagged Nigeria’s regulatory quality and environment, where the country scored 17.25, in what implies “significant risk,” after ranking poorly in the World Bank’s Ease Of Doing Business Index, placing 131st out of 190 global markets.

This, it stressed, is an indication of “a less attractive operating environment compared with regional peers.”

It also noted “concerns about the influence the government holds over central bank policymaking.”

Fitch announced a downward revision of its growth forecast for the Nigerian banking industry with customer loan size at N14.9tr in 2020 amidst business uncertainty, contracting by 2.5%, from 14% in 2019. The report forecast a 4.3% growth in 2021 as the economy begins to recover.

The report expressed optimism that the reduced minimum loan requirement would “help drive client loan growth over the medium term.”

The agency also revised its forecast for the country’s total banking asset growth to N44.2trn, up by 5.3%, due to what it termed economic headwinds caused by the coronavirus pandemic; just as average annual asset growth is projected at 12.0% to N63.8trn by 2024.

Asset quality in the country, Fitch noted, has improved, with non-performing loans (NPLs) ratio tied to the oil sector declining by 40.7% between Q418 and Q419, as oil exports rose by 16.1% in 2019. Total NPL ratio fell therefore from 11.7% to 6.0% over this period.

“However, due to the combined economic impact of the Covid-19 pandemic and lower oil price, we expect asset quality to deteriorate this year, making banks more cautious about lending.”

Due the lockdown induced by the pandemic, leading to lower consumer spending and economic activity, Fitch revised the Nigeria’s economic outlook, forecasting a contraction of 3.9% in 2020, a very modest rate, compared to 5.4% contraction projected by the International Monetary Fund (IMF) in its World Economic Oulook.

The recession, it noted, will be caused by weaker oil prices due to slower global activity that will also weigh in on Nigeria’s economic expansion during this year.

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