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Nigeria may not be able to bail out banks that get into trouble

By David Whitehouse
Posted on Monday, 29 July 2019 17:19

Nigeria's Central Bank Governor Godwin Emefiele. REUTERS/Afolabi Sotunde

A report from Fitch Ratings in July highlights the dangers that Nigerian banks face as they grapple with new rules designed to stimulate lending.

As argued in The Africa Report in early July, a Nigerian central bank directive which obliges banks to have a minimum loan to deposit ratio of 60% by the end of September risks a deterioration in asset quality. The move is intended to force banks to buy fewer high-yielding government securities and lend more to the real economy. It includes incentives to lend more to small and medium-sized enterprises (SMEs) and retail borrowers.

Lending at the Nigerian banks that Fitch covers rose by only 1% in 2018, restricted by tight naira liquidity and the crowding-out effect from high treasury bill yields. Omotola Abimbola, a macro and fixed income analyst at Chapel Hill Denham in Lagos, says that there is no easy way for the central bank to cut treasury bill yields to push banks into riskier types of loans.

  • He argues that the central bank is constrained by the fact that foreign portfolios are heavily invested in open market treasury bill operations and the currency market could “come under pressure if yields decline to single digit.”

Fitch expects loan growth of around 10% for 2019 on the back of the moves to encourage more retail and SME loans. But Abimbola doubts that banks will rush to increase lending to meet the new rules.

  • “Rather, they might opt to reduce their more expensive funding base (term deposits) to comply in the interim, while strengthening internal capacity to increase lending to priority sectors including SME, consumer and mortgage,” he says.

Sovereign support in question

Fitch argues that it’s “unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards.” Banks are already struggling with a high level of problem loans and current operating conditions “are not conducive to rapid loan growth and could inflate asset-quality problems in the future,” Fitch says.

The larger banks such as GTB, UBA and Zenith, which are country’s highest rated lenders at ‘B+’, are the best placed to withstand downside shocks, Fitch says.

  • But Abimbola argues that Zenith and UBA could be the worst affected amongst Nigeria’s large banks, as they both fall short of the new lending requirements.

The economy is unlikely to provide much of a tailwind.

  • Nigeria’s recovery is weak, Fitch argues, predicting that GDP growth will average 2.2% in 2019-2020, far below the previous 10-year average of 4.2%.
  • “High unemployment and inflation will constrain private consumption while investment is held back by a weak business climate and regulatory uncertainty in the oil sector,” Fitch says.

The biggest danger may lie in Nigeria’s questionable ability to bail out banks if they get into trouble.

  • “Sovereign support is uncertain and senior creditors cannot rely on receiving full and timely extraordinary support from the Nigerian sovereign if any of the banks become non-viable,” Fitch says.

The bottom line: Nigeria needs to wean foreign funds away from high-yielding T-bills by making the real economy more attractive to invest in.

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