Nigerian Banks profitability under threat

By Odunewu Olusegun

The profitability of Nigerian Banks in the medium term may be under threat following rising inflation and increased government borrowing that was caused by the COVID-19 pandemic.

National Daily gathered from a report released recently by Fitch Solutions that the banks are expected to grow in the medium term, but the rate of growth would be determined by the effects of inflation and government’s borrowing from the banks.

The report stated that due to COVID-19 pandemic and a weakened oil sector, there would be a deceleration of client loan growth from 14.0 per cent y-o-y in 2019 to 2.5 per cent in 2020, before a small pickup to 4.3 per cent in 2021.

Similarly, the demand for credit would weaken amid reduced economic activity and elevated uncertainty among consumers and businesses while deteriorating asset quality will make banks more cautious in issuing loans.

In the meantime, Fitch Solutions has revised its earlier 2020 growth forecast for Nigerian banks, including their total banking asset growth. The decision to change the earlier forecast was made out of consideration for the economic shortfalls caused by the pandemic.

Recall that Nigeria’s adoption of the IFRS 9 accounting standards for bad loans had considerably helped to improve asset quality in the banking sector. As a matter of fact, the ratio of non-performing loans had declined by as much as 40.7 per cent between Q4 2018 and Q4 2019.

Unfortunately, the pandemic and the dramatic fall in oil prices earlier this year, all combined to negate the recent recorded success. This is why banks’ asset quality is projected to deteriorate this year, according to Fitch Solutions. This will also make banks become more cautious about lending.

“We continue to expect the changed minimum loan requirement to help drive client loan growth over the medium term. We have revised our growth forecast from the previous quarter and expect client loans to reach NGN14.9trn in 2020 with growth of 2.5 per cent from 2019.

“Due to economic headwinds caused by the coronavirus pandemic, we have revised our forecast for total banking asset growth to 5.3 per cent to NGN44.2trn. Over the medium term, we see average annual asset growth of 12.0 per cent to NGN63.8trn by 2024.

“Nigeria’s ratio of non-performing loans (NPLs) tied to the oil sector declined by 40.7 per cent from Q418 to Q419 as oil exports rose by 16.1 per cent in 2019. In turn, the total NPL ratio fell from 11.7 per cent to 6.0 per cent 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.”