Global rating agency, Fitch has sounded the alarm that Nigeria’s financial sector is likely going to experience turmoil.
The agency noted that the country’s banks are heading into financial and operational storms in view of what it called the increasingly difficult conditions under which they are operating.
This is likely to result in a sharp deterioration in profitability, asset quality, liquidity and capital ratios.
In its report on Thursday by the Director, Financial Institutions, Mahin Dissanayake, Fitch Ratings insisted that Nigerian banks are highly exposed to the domestic market and that the economic slowdown would affect their performance.
“We said the sector outlook was negative in December. GDP figures for 2Q15, released yesterday, show weaker year-on-year growth of 2.4 per cent, down from four per cent in the previous quarter, the slowest quarterly growth rate for over 10 years.
“The volatile operating environment is highly important in determining ratings for all Fitch-rated Nigerian banks, keeping their Viability Ratings low, in the highly speculative ‘b’ category.
“Nigeria’s oil sector growth slowed in 2Q15 and non-oil growth was just 3.5 per cent, down from 5.6 per cent in 1Q15. Part of this slowdown was caused by temporary fuel shortages, which caused industrial production and manufacturing output to contract.
Lower oil prices, reduced government spending and restrictions on foreign exchange availability are also taking their toll on performance across the economy.
Positively, agricultural output, construction, telecommunication services, internal trade and financial services continued to grow.
“Nigerian banks have had to contend in recent months with the increased vulnerability of the oil and gas sector, pressure on the naira, the slower economy and tightening bank liquidity.
These are all credit negative for the sector. Since the beginning of August, public sector deposits, which represent around eight per cent of total system deposits, have exited the commercial banks and must be held at a single treasury account at the central bank.
This adds pressure to liquidity. No significant changes in economic policy have materialised following the change of government at end-March 2015, but until a new cabinet is formed and a clear policy framework is announced, uncertainty will weigh on the outlook.
“Loan growth contracted in 1H15, which is likely to translate to weaker bank financial metrics for the year.
We believe sector non-performing loans will rise above the central bank informal cap of five per cent but below 10 per cent of total sector loans by end-2015. Regulatory capital adequacy ratios are likely to fall further due to lower earnings, weaker asset quality and a limited ability to raise capital.
Tier 1 capital ratios could fall below 15 per cent for many banks, which is low by historical standards for Nigeria.
“In our opinion, key financial metrics reported by Nigeria’s banks are likely to continue to decline in the closing months of 2015. A prolonged economic downturn would likely put pressure on bank ratings.”