By Odunewu Segun
With the recent hike of the Monetary Policy Rate from 12 per cent to 14 per cent by the Central Bank of Nigeria last month, there are likely to be more pressure on the assets of some banks in the country.
According to Global rating agency, Fitch ratings, the rising rates are likely to put additional pressure on banks’ asset quality. It said since almost all lending is extended at floating rates and banks should be able to reprice their loans quite quickly but borrowers will face more difficulties in servicing their debts.
“Impaired loans are already high in the Nigerian banking sector, where average non-performing loan ratios reached 6.2 per cent at end-March 2016, partly reflecting the impact of currency depreciation on businesses as well as higher oil-related problem loans at some banks.”
It noted that with rising rates, excess liquidity in the banking sector was likely to flow into additional holdings of higher-yielding government debt.
Government securities represent about 16% of total Nigerian banking sector assets and 10-year senior bonds yield about 15.3%. Despite the rate rise, real interest rates remain negative when considering inflation, which reached 16.5% in June 2016.
Nevertheless, for the domestic banks, government bonds represent low-risk, low capital intensive investments. Lending, particularly in foreign currency, carries higher risks.
The rate increase will also lead to higher funding costs for the banks. This and the switch away from loans and into fixed-income government bonds are likely to squeeze Nigerian banks net interest margins.
“We also expect operating costs and loan impairment charges to rise but still expect Nigerian banks to remain profitable in 2016,” the Fitch said.
Fitch also expects loan growth (excluding foreign-exchange translation effects) to slow during the second half of 2016 and into 2017.