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Nigeria VS Coronavirus: Corporate governance over capital strength

In depth
This article is part of the dossier: How will Nigeria navigate the pandemic

By David Whitehouse
Posted on Friday, 22 May 2020 19:55, updated on Monday, 29 June 2020 18:46

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Corporate governance rather than capital strength is the main challenge facing Nigerian regulators and banks grappling with lending exposure to the country’s oil producers. In the second story of our series, we look at the impact of COVID-19 on Nigeria's economy as it considers the outlook for banks who have lent to oil producers.

This is part 2 of a series.

Like so many governments around the world, ministers in Abuja are closely monitoring the effects of the coronavirus pandemic to see whether the economic crisis it triggered via production shutdowns, slumping demand and crashing commodity prices might extend further to precipitate a financial crisis.

Nigeria’s economy impacted by COVID-19

This time we seem to see the reverse pattern of developments following the global financial crisis in 2008-2009, says a senior official in Abuja: “What we fear is that the crisis in the real economy caused by the pandemic could destabilise the banking and insurance sectors…but so far we are seeing much more resilience in those sectors built up over the past decade.”

State revenues are going to be hit hard, with the IMF forecasting that Nigeria’s oil earnings could halve to around $27bn with prices at under $30 a barrel, compared to the estimates of Finance Minister Zainab Ahmed’s budget for 2020 premised on oil at $57 a barrel.

READ MORE IMF optimism and oil-dependent countries: be wary of sunny projections

For banks, the critical factors will be how much they are exposed to loans to Nigeria’s indigenous oil companies, now struggling with tight new cost and revenue structures, and to what extent the slowdown of government spending will add to pressure on the banks’ corporate and individual customers and their ability to service their debts.

“The supervision of deposit banks by regulators has improved since the 2008-2009 economic crisis, yet it is still a far cry from what is expected,” says Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos. “The current governance and risk management system is not strong enough to provide cover for lenders from the overall impact of the crisis.”

Nigeria’s banks

Nigeria’s Tier 1 banks will be able to withstand even a long-term recession, says Ojo. The Tier 1 banks are FBN Holdings, United Bank for Africa, Guaranty Trust Bank, Access Bank and Zenith Bank, collectively known as ‘FUGAZ’.

READ MORE: Coronavirus: Nigeria’s Access Bank announces salary cuts to curb job loss

  • Tier 2 banks can weather a medium-term recession, while Tier 3 banks will be able to manage only in the short term, Ojo says.
  • Ojo sees corporate governance as a more important issue than financial strength.
  • Strict enforcement of prudential guidelines, sector allocation limits and insider dealing rules is needed.
  • “The supervision hasn’t gotten to a high standard yet.”

READ MORE: Nigeria’s health and economic crisis: Buhari left to face it without Abba Kyari

Mike Magaji, group chairman at Renaissance Media in Lagos, says there has been “too much lending, especially to downstream companies. There will be restructuring of loans. Moratoriums have to happen or there will be default.”

But he sees no signs of systemic banking distress. The main challenge, he says, is to improve the quality of regulators to control risk. The quality of management at Nigeria’s banks, he says, “varies widely.”

Non-performing loans

In 2010, the ratio of non-performing Nigerian banks loans soared to over 35% of gross loans, lagging the 2008 oil price collapse, Fitch data show. NPLs then dropped to below 10% at the end of 2011 as oil recovered. The 2014-15 slump in oil pushed Nigeria NPLs back to levels around 15% in 2016 and 2017.

  • Fitch expects a rise in restructured loans to 25%-30% of gross loans in 2020-2021.
  • According to Fitch, the Nigerian banks with the largest proportion of problem loans are Access Bank and FBN – both in Tier 1.

According to analysis from the Agusto credit rating agency in Lagos, further naira weakening would increase the risk of more non-performing foreign currency loans.

READ MORE: Coronavirus: Nigeria goes home for funds out of fear on COVID-19 impact

  • Foreign loan books are dominated by import-dependent sectors such as oil, gas and manufacturing.
  • The oil and gas sector accounted for about 30% of Nigerian banks’ gross loans at the end of the third quarter in 2019.

Agusto sees some grounds for hope in the adoption of tighter lending practices since the 2016 recession.

READ MORE: Coronavirus: recession in Nigeria likely, despite measures in place

  • The agency notes a move to short-dated, cash-backed trade transactions that self-liquidate, and the conversion of some foreign currency loans into naira.
  • Naira devaluation will support the earnings of banks with net foreign currency asset positions, Agusto says.
  • There’s also the prospect that COVID 19 will push more customers to start using digital banking platforms, which could mean higher electronic banking income.

Bottom Line: Nigerian banks are strong enough to weather the storm: regulation and corporate governance will be crucial to limiting the damage.

For part 1, click here.

For part 3, click here

For part 4, click here.

For part 5, click here. 

For part 6, click here.

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