Moody’s maintains stable outlook on Nigerian banking system as dollar shortages set to ease

MOODY’S Investors Service is maintaining its stable outlook on the Nigerian banking system, reflecting the rating agency’s view that acute foreign-currency shortages will gradually ease, though loan risks will remain high.

The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Nigeria over the next 12-18 months.

“With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our outlook period,” says Akin Majekodunmi, Vice President and Senior Analyst at Moody’s.

“However, we expect asset quality to worsen slightly over the outlook period, as historically low oil prices, currency depreciation and economic contraction experienced in 2016 continue to generate new nonperforming loans in 2017.”

The rating agency expects Nigeria to see real GDP growth of 2.5 percent in 2017 and 4 percent in 2018, after a 1.5 percent contraction last year, as noted in March 2017. The revival will be supported by government measures to expand non-oil sectors and its commitment to fund large infrastructure projects, as well as by a partial rebound of global oil prices from lows last year.

Risks to asset quality are likely to remain high, with nonperforming loans (NPLs) likely to rise to between 14-16 percent from 14 percent at end-2016. They should, however, reach a peak as write-offs, loan restructurings, and the strengthening economy take effect.

Nigerian banks should have sufficient capital to absorb expected losses, though Moody’s expects system-wide tangible common equity (TCE) to only decline slightly to 14.1 percent of adjusted risk-weighted assets by year-end 2018 from 14.7 percent at the end of 2016. The slight shift is primarily due to increased loan-loss provisions and the effect of further expected naira depreciation on the balance of risk-weighted assets denominated in foreign currency.

Moody’s also sees the banks’ loan-loss provisioning weakening their net profitability. The rating agency expects return on assets to decline to around 1 percent in 2017 from 1.3 percent at the end of 2016 on account of high provisioning costs at around 3 percent of gross loans. System-wide pre-provision income will likely remain robust, however, at around 4 percent of average total assets, supported by high yields on government securities and profits on open foreign currency positions.

Lastly, Moody’s considers there to be a high probability of the Nigerian government supporting banks in case of need, given the significant consequences of a bank collapse to both the payments system and the wider economy.