Nigerian banks’ exposure to the country’s oil, gas and agriculture sectors could weigh on their credit quality in the coming decades as climate-related risks intensify, Fitch Ratings has warned.

In its latest report, African Banks Have Structural Exposure to Climate Risk, Credit Implications Evolving, the global rating agency said the country’s dependence on hydrocarbons and agriculture leaves its banking sector particularly vulnerable to both transition and physical climate risks.

It noted that while the immediate impact remains manageable, the risks are expected to grow over time and could weaken banks’ asset quality, increase credit losses and create broader challenges for the financial system.

Fitch said Nigerian banks are among the most exposed in Africa because a significant share of their loan portfolios is concentrated in oil and gas, mining, heavy industry and agriculture, sectors that are vulnerable to changing climate policies, technological shifts and evolving investor preferences.

According to the report, tighter global climate commitments could reduce the profitability of carbon-intensive industries and leave some assets stranded, increasing credit risks for lenders with concentrated exposures to those sectors.

The agency also warned that agriculture-related borrowers face mounting challenges as floods, droughts and other extreme weather events become more frequent and severe.

These developments, it said, could weaken borrowers’ repayment capacity, reduce the value of collateral and result in higher credit losses across the banking sector.

While transition risks remain the dominant concern in the near term, Fitch expects physical climate risks to become increasingly significant by 2050. It projected that rising temperatures, flooding, droughts and other climate-related hazards would weigh on economic growth across Africa, with West Africa identified as one of the regions most vulnerable to climate change.

For Nigeria, the report said climate-related shocks could weaken household incomes, reduce corporate profitability and increase macroeconomic volatility, developments that may translate into higher credit risks for banks.

It added that collateral linked to agriculture and real estate could also lose value over time, resulting in higher loan-to-value ratios and increased impairment charges.

Using its Climate Vulnerability Signals framework, Fitch estimated that Nigeria could record a combined climate risk score of between 50 and 55 by 2050, placing it alongside Ghana, Egypt, Kenya and South Africa in terms of climate vulnerability.

The report also highlighted the increasing regulatory focus on climate-related policies across Africa, noting that Nigeria is developing carbon-pricing and carbon-market frameworks as part of broader efforts to meet its climate commitments and support the transition to a lower-carbon economy.

While such measures are expected to advance sustainability goals, Fitch said they could also raise operating costs for businesses in affected sectors, with potential spillover effects on banks through weaker credit performance among borrowers.

It also noted that the Central Bank of Nigeria (CBN) is developing frameworks to strengthen climate risk classification, governance and disclosure within the financial sector as regulators place greater emphasis on climate risk management.

Despite the risks, Fitch said the changing landscape presents opportunities for banks that proactively adapt through green finance, sustainable lending and climate-focused investment products.

The agency urged lenders to integrate climate considerations into their risk management frameworks, diversify sector exposures and engage customers on low-carbon transition strategies. It warned that banks that fail to adapt could face reputational risks, weaker investor confidence and funding constraints as global capital increasingly favours institutions with stronger sustainability credentials.

Fitch noted that Nigeria faces the challenge of balancing its dependence on oil and gas revenues with its commitment under the Paris Agreement to reduce greenhouse gas emissions and pursue long-term net-zero targets.

The agency concluded that although the transition is likely to be gradual, banks that begin preparing now for the structural changes ahead will be better positioned to manage emerging risks, strengthen their resilience and support sustainable economic growth.