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Nigerian banks must pile on the risk to meet new loan rules

By David Whitehouse
Posted on Tuesday, 9 July 2019 11:59

The headquarters of Nigeria's Zenith bank in the Victoria Island district of Lagos July 29, 2016. REUTERS/Akintunde Akinleye

A Nigerian central bank directive which obliges banks to have a minimum loan to deposit ratio of 60% by the end of September is intended to force banks to lend more to the real economy and buy fewer government securities.

Analysts fear that the speed of the move risks a deterioration in asset quality.

  • The central bank’s message is that it’s “no longer business as usual for the banks,” says Fola Abimbola, equity research analyst at FBNQuest in Lagos.
  • The move “may unintentionally result in a reduction of banks’ risk management criteria for loan extension and by extension a deterioration in asset quality,” he says.
  • Abimbola expects more policies designed to increase bank lending to follow.

Loan ratios at Nigerian banks shrank between 2016 and 2018 as slower economic growth and high yields on government securities prompted banks to load up on lower-risk assets.

The new move encourages lending to small and medium-sized businesses (SMEs), mortgages and consumer loans by overweighting these loans at 150%.

That aims to encourage banks to accept the risk of an increase in non-performing loans (NPLs).

  • Consumer lending in Nigeria is hampered by lack of reliable household credit records and weak recovery enforcement, Moody’s says in a note on July 8.
  • Midsize banks with higher exposure to consumer and SME loans tend to have higher NPL ratios than large banks, according to Moody’s.

Affected banks

Banks that fail to meet the new threshold will have to pay half of the shortfall as an additional cash reserve requirement.

Moody’s argues that banks will be forced to diversify their lending, so reducing concentration risk, and says that most have already complied.

According to Abimbola, Zenith Bank, United Bank for Africa (UBA), Guaranty Trust Bank (GTB) and Stanbic are most affected as they have loan ratios lower than the threshold.

  • Ignoring the central bank’s weighting concession for lending to preferred sectors, Abimbola calculates that Zenith and UBA will both have to increase their loan books by over 350bn naira (870m euros, $970m) by September 30.
  • GTB and Stanbic will have to add 165bn naira and 30bn naira of new loans respectively, he says.
  • That implies absolute quarter-on-quarter loan growth of 20% for Zenith.

Abimbola argues that it’s unusual for banks to increase their loan books by more than 10% in a whole year.

  • This could see downside risk on NPLs in the short term, which may prompt markets to start to pricing in negative headlines from the banks.

Charles Robertson, global chief economist at Renaissance Capital, says that a market-friendly option would be for the government to close its budget deficit.

  • This would force banks to lend to someone other than the government, he says.
  • In the longer term, lower inflation would cut interest rates and encourage lending and borrowing, he argues.

Bottom Line: Tackling the deficit and inflation would be safer ways for Nigeria to increase lending than a rapid loading of risk onto the banks.

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