Nigeria: Banks can ‘extend and pretend’ on problem loans, say analysts

By David Whitehouse

Posted on Tuesday, 27 July 2021 09:31
Nigeria's Central Bank headquarters in Abuja, November 22, 2020. REUTERS/Afolabi Sotunde

A prediction by Moody’s that Nigerian banks will have the joint highest proportion of problem loans among emerging markets by the end of this year is seen by analysts as too pessimistic.

Problem loans at Nigerian banks are set to rise to 9% of total loans by the end of this year, versus 6% in 2020, Moody’s predicts. That would give Nigerian banks a joint, high level of problem loans alongside Russia among the emerging markets which Moody’s surveyed.

The underlying non-performing loan (NPL) ratio of the sector is much higher than the reported 6%, due to the central bank allowing banks to provide moratoriums to borrowers hurt by Covid-19, says Ronak Gadhia, director for sub-Saharan African banks research at EFG Hermes Frontier in London.

The central bank will allow commercial banks to “continue to ‘extend and pretend’ or provide further moratoriums to distressed borrowers,” he says.

  • The recent rebound in oil prices will also alleviate some of the asset-quality pressures, given that 20-30% of banks loans are to the oil and gas sector, he says.
  • The central bank, Gadhia says, has other priorities; namely, managing the exchange rate, stimulating the economy and reducing inflation.
  • “The last thing the central bank will do is force the banks to recognise underlying asset quality issues, which could lead to further uncertainty in the economy.”

Moody’s forecast problem loan ratio of 9% is “too pessimistic”, says Ikechukwu Iheanacho, CEO of Voyager Investments in Lagos. Retail as well as small and medium sized businesses with workable terms from the banks will be granted loan restructuring if need be, he adds.

Sterling Bank, FCMB, Fidelity Bank and Guaranty Trust Bank are the strongest in terms of coverage of problem loans, while First Bank and Stanbic IBTC – with 48% and 83% coverage respectively – give more cause for concern, he says.

But even these are the commercial banking subsidiaries of strong holding companies that can take other routes to capitalisation if necessary, Iheanacho adds.


A research note from Jacques Nel at NKC African Economics that was published on 26 July says while risks remain, there has been some improvement in the Nigerian economy. He predicts that oil production and exports will recover in the second half, but not to 2019 levels. According to Nel, GDP growth is likely to come just above 3% this year.

Economic activity in Nigeria is “at least enough for businesses to operate with relative stability,” says Joshua O. Odebisi, an analyst at Vetiva Capital in Lagos. “The risk of default is not as high as some might expect.”

  • Unless there is a return to hard lockdown it is “very difficult to envisage a scenario where asset quality deteriorates to 9.0% levels” by the end of the year. Zenith and Access Bank are probably the most stable banks and will remain so, he adds.
  • Even in a worst-case hard-lockdown scenario, the central bank would likely act to stave off the risk of NPLs worsening to that degree, Odebisi says.

Monetary policy tightening later this year could see NPLs rise as higher interest rates increase the cost of servicing loans, says William Attwell, senior country risk analyst at Fitch Solutions in London.

Regulatory forbearance will remain in place until March 2022, but NPLs are then likely to increase more sharply, he says.

“This trend may see banks adopt more cautious lending practices in the coming quarters.”

Banks are likely to respond by diversification rather than consolidation. Odebisi expects the big banks to branch out into business lines outside of traditional banking such as fintech, insurance asset and wealth management.

Bottom line

Analysts see the bigger Nigerian banks as having enough central bank support to weather the storm.

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