Moody’s cuts Nigerian banks’ risk outlook on rising oil prices

The outlook for the Nigerian banking system remains stable, as banks’ foreign currency liquidity risks moderate due to rising oil prices and a more liberal foreign exchange policy, says Moody’s Investors Service in a report published today.  

The report, “Banking System Outlook — Nigeria; Liquidity risks have eased but earnings pressure and loan quality risks remain,” is available on www.moodys.com. The research is an update to the markets and does not constitute a rating action.

Despite the stabilisation in banks’ foreign currency funding and liquidity profiles, Moody’s expects banks’ earnings to come under pressure. Capital metrics will also decline marginally over the 12 to 18 month outlook period. Additionally, asset quality will remain weak, but a further deterioration in loan performance will be marginal as operating conditions slowly improve.

“Operating conditions for the Nigeria’s banks will continue to gradually improve over the next 12 to 18 months, but remain challenging. Nigeria’s growth prospects remain vulnerable to global oil prices, as crude oil will remain the nation’s largest export commodity and its main generator of foreign currency for the foreseeable future,” the Vice President and Senior Credit Officer, at Moody’s, Akin Majekodunmi, said.

Moody’s forecasts a recovery in real gross domestic product (GDP) growth over the next two years, up from 0.8 per cent last year, helping lending growth rise to around 10 per cent after a 15.4 per cent contraction in 2017.

Nigerian banks’ profitability will nevertheless decline on account of lower yields on government securities, as well as a likely reduction in income from derivatives. However, these pressures will be partially offset by a recovery in loan growth and transaction income from the expansion of digital platforms.

Meanwhile, nonperforming loans (NPLs), and associated provisions in the banking system will increase marginally in a delayed response to sluggish economic growth experienced last year, and Moody’s expects them to range between 15.5 per cent and 18 per cent of gross loans over the outlook period.