CBN’s withdrawal of COVID-era forbearance raises profitability, capital concerns for Banks

Nigerian banks are bracing for heightened financial stress as the Central Bank of Nigeria (CBN) begins to unwind regulatory forbearance measures introduced during the COVID-19 crisis, a move analysts say could squeeze profits, thin out capital buffers, and trigger a spike in non-performing loans (NPLs).

In a circular released Friday, the apex bank directed all financial institutions currently benefiting from regulatory forbearance—such as waivers on credit exposures and breaches of Single Obligor Limits—to immediately suspend dividend payments, defer executive bonuses, and cease all new offshore investments or expansion.

The new directive marks a decisive shift from crisis-era leniency to a more risk-sensitive regulatory posture as the central bank seeks to restore prudential standards amid Nigeria’s volatile economic recovery.

Already grappling with massive credit impairments, Nigerian banks may see fresh pressure on earnings. According to market data, ten listed commercial banks recorded a combined ₦3.77 trillion in loan impairment charges from 2023 through Q1 2025.

This represents a dramatic increase from ₦1.34 trillion in 2023 to ₦2.13 trillion in 2024, with an additional ₦297 billion recorded in just the first quarter of 2025.

Regulatory forbearance, which was introduced in March 2020, had allowed banks to restructure loans to distressed sectors such as oil and gas, power, and agriculture without classifying them as impaired. This helped to suppress the sector’s NPL ratio to a modest 4.3%, below the CBN’s 5% threshold—even during periods of macroeconomic turbulence.

But with the CBN now aiming to phase out what it considers a distortionary relief mechanism, Nigerian banks may soon have to reassess these restructured assets, potentially exposing a wave of hidden defaults.

READ ALSO: CBN bans dividend payments, bonuses, offshore investments for Banks under regulatory forbearance

Estimates by Renaissance Capital show that seven major Nigerian banks—Zenith Bank ($910 million), FBN Holdings ($848 million), UBA ($771 million), Access Bank ($535 million), Fidelity Bank ($556 million), FCMB ($332 million), and GTCO ($60 million)—carry a combined $4 billion in restructured loans.

Most of these are categorized under Stage 2 of IFRS 9, indicating significantly increased credit risk, although not yet formally designated as non-performing.

These exposures are largely concentrated in the oil and gas sector, heightening concerns amid persistent foreign exchange volatility and sluggish global crude demand.

While some institutions have made considerable provisions—GTCO, for instance, has reportedly covered 80% of its restructured book—others remain under-prepared. FBNH’s largest exposure, oil firm Aiteo, has resumed interest payments, but uncertainty persists over principal repayment.

Despite the potential storm, many banks have built robust buffers. Zenith Bank leads the pack with a 298.4% NPL coverage ratio, meaning it holds nearly three times more in provisions than current NPLs. GTCO (138.7%) and Fidelity Bank (138.4%) also maintain healthy cushions.

Others, however, may need to reinforce their defenses. UBA (80.9%) and FBNH (52.4%) show weaker provisioning levels, raising concerns about their ability to absorb future shocks.

While the CBN’s policy tightening aims to improve transparency and restore balance sheet integrity, the impact is expected to be uneven across the banking sector. Institutions with lower NPL coverage ratios, higher concentration in vulnerable sectors, or under-provisioned restructured loans could face capital erosion or earnings pressure.

Nevertheless, analysts suggest that Nigeria’s systemically important banks—those with high capital buffers and proactive risk management—are better positioned to weather the withdrawal of regulatory support.

As the financial ecosystem adjusts to this new phase of prudential discipline, stakeholders will be watching closely to see how individual banks navigate the transition from pandemic-era relief to post-forbearance resilience.