Report have emerged that the current economy is beginning to have an adverse effect on the performance of Banks in Nigeria, Africa’s largest economy. The banks are to face rising uncertainties in 2015; this is according to Standard& Poor rating in its recent report.
The collapse of world’s oil price and the mounting weakness of the naira are among the forces raising credit risks and reducing growth opportunities for Nigerian banks.
“The year 2015 is expected to pose some stiff challenges for the banking sector. Despite the acceleration in lending, the banking system’s overall margins weakened in 2014, largely due to regulatory constraints,” said the report.
“We expect regulatory changes enacted in 2013-2014 to have an ongoing negative impact on banks profitability,” report further stated.
The increased levy to 50 basis points of total assets, banks are expected to pay asset management corporation of Nigeria (AMCON) will add to their already high cost base, and the requirement that banks hold a 75 percent cash reserve on public sector funds will continue to undermine net interest margins.
“We expect Nigerian banks’ access to debt and capital markets will be more difficult in 2015, which will also contribute to ongoing capital constraints.”
Despite oil price gaining some momentum now, in the past eight months, the world has witnessed the greatest oil meltdowns in history. Winners and losers have emerged from this trend, and this has triggered a number of serious macroeconomic outcomes that affect virtually all regions on earth.
According to Standard& Poor, “We believe Nigeria’s weak rule of law and high levels of corruption, significant infrastructure shortfalls, and wealth concentration all make the country vulnerable to periods of economic volatility.”
The naira’s weakening could increase non payment risk in foreign currency loans. Although a large portion of these loans are backed by U.S. dollar receivables from the hydrocarbon industry, the portion not backed by such receivables represents a risk factor.
The report also stated that the pace of lending growth accelerated in 2014 as banks took advantage of opportunities in the power, agriculture and infrastructure sectors. “We believe rapid credit growth, especially into new sectors, could undermine banks progress in raising their underwriting standards.”
Industry concentrations could have major repercussions for the entire banking sector especially the key sectors of the economy. For rated banks, the top-20 loans average approximately 40 percent of gross lending, with most large banks having similar corporate borrowers.
In a bid to salvage the Nigerian economy from the volatility of the global crude oil prices CBN devalued the naira by 8 percent in November accompanied by a 100 basis point interest rate hike to a record 13 percent.
The naira depreciated below 200 per dollar for the first time last month as the nation’s election postponement increased the likelihood that the naira will be devalued. Investors are delaying decisions to commit money to Nigeria as security forces, which requested the vote date be changed, push to secure the northeast from a raging Islamist insurgency.
“We expect interest income from loans and government securities to benefit banks somewhat in 2015. We also anticipate that net interest margins will be constrained by slower loan growth in 2015 than in the previous two years, at between 10 percent and 15 percent”
“Nigerian bank capital adequacy has gradually deteriorated over the past few years, and we expect 2014’s higher volume of lending and the implementation of Basel II minimum capital requirements to lead to capital constraints for a number of banks, especially those making acquisitions,” the report added.
JOSEPHINE OKOJIE
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