International rating agency, Fitch has said that devaluation of the naira will lead to the rise of loan impairments.
In its monthly review, Fitch said Impairments in banks are increasing in the commercial, trading and manufacturing segments, mainly due to foreign currency depreciation and scarcity.
It said NPLs in the oil sector are also rising, but most of the larger problem loans are being restructured. FBN’s high NPL ratio is mainly due to the bank’s exposure to the downstream oil sector. Sustained low oil prices and continuing production disruptions in the Niger Delta could cause industry NPL ratios to rise more dramatically.
According to Fitch, Fitch, strong regulatory capital ratios have helped offset the one-off impact from the devaluation arising from Nigeria’s new FX regime. Nevertheless, the buffer between banks’ capital ratios and the regulatory minimum is reducing.
“We expect higher retained earnings to ease some of this pressure. Further erosion of capital ratios could be credit-negative.”
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Despite the new FX regime, Fitch expects foreign currency liquidity to remain tight in 2016, particularly as supply has not increased dramatically. It believes that the willingness of the Nigerian authorities to support domestic banks continues to be high (as demonstrated in the past).
However, the state’s ability to provide support, particularly in foreign currency, is weaker due to falling oil prices eroding Nigeria’s foreign exchange reserves and foreign currency revenues.
Some banks have accumulated sufficient foreign currency liquidity to meet 2016 maturities and Fitch believe that they are managing their liquidity risks commensurately with their value at risk (VR) levels, but refinancing risk on the banks’ foreign currency obligations remains high, even as Naira liquidity is satisfactory.