Banks Credit Outlook Projected To Be Weak This Year | Independent Newspapers Nigeria


LAGOS – There is no doubt that the banking sector plays a critical role in keeping economies vibrant and societies stable but the situation now facing the sector is undeniably se­vere, going by analysts’ views.

Depending on whether a rapid or slow recovery scenar­io prevails, Nigeria’s banking sector faces a prolonged peri­od of uncertainty.

The outlook for Nigeria’s banking sector for 2021, ac­cording to financial analysts, will be shaped by a second wave of the pandemic, in­creasing the vulnerability of banking credit to default risks and pushing up non-perform­ing loans (NPLs) once again.

The sector, analysts said, will remain negative into 2021 amid difficult operating con­ditions and sovereign pres­sures straining banks credit profiles.

Moody’s Investors Service, in its recent report, said banks financial stability would be broadly maintained.

“Stable local currency deposit funding, high liquid­ity in local currency, good capital buffers, and gradual improvements in risk man­agement will help to contain banks’ risk over the next 12 to 18 months,” Moody’s added.

According to the rating agency, loan quality, profit­ability, and foreign currency liquidity would be the main stress points this year for banks in the continent, al­though stable funding and capital could limit the impact.

It noted in the report that difficult operating conditions were expected to persist for African sovereigns, with the resulting pressures also weighing on banks’ credit profiles.

Furthermore, it stated that the economic slowdown in the continent would hamper banks’ performance, stating that governments’ ability to provide support remains im­paired.

“Banks will remain heav­ily invested in government securities, which further reinforces the close credit linkages between banks and their respective sovereigns,” Moody’s added.

Prof. Uche Uwaleke of the Nasarawa State University said the year 2020, despite being loaded with negativity, had been a good year for the banking sector as most banks performed well in the year.

As at the third quarter of the year, Tier 1 banks in the country, namely Zenith Bank, Access Bank, Guaranty Trust Bank, United Bank for Africa, and FirstBank recorded im­pressive results, while those in tier 2 and tier 3 also did well.

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“I think the sector fared rel­atively well when compared to other sectors of the economy despite the negative impact of COVID-19.

“This much is confirmed by the National Bureau of Sta­tistics numbers which show that financial institutions, especially the banks, togeth­er with the information and communication sector, have remained in the positive terri­tory with respect to real GDP growth, year-on-year, thereby helping to moderate the cur­rent economic recession”, Uwaleke said.

It is equally corroborated by the CBN which confirms, through its November MPC communiqué, that financial soundness indicators for banks in 2020 actually im­proved with non-performing loans a little above the CBN five percent threshold while capital adequacy ratios and liquidity ratios are above the CBN benchmarks of 15 per­cent and 30 percent, respec­tively.

Of note too is the fact that, according to the CBN, aggre­gate credit to the real sector has been on the increase since 2020.

The performance of the banks in 2020 was bolstered by the surge in online trans­actions in the wake of the pan­demic leading to many banks recording increases in non-in­terest income, according to their nine-month unaudited financial statements.

Not surprisingly, banking stocks have outperformed the stock market thus far, especially tier-1 banks stocks of GTB, Zenith, FBN, Access and UBA with year-to-date returns higher than the NSE All Share Index of about 40 percent.

Uwaleke stressed that an­other source of vulnerability that the banking sector will experience is the internation­al oil market.

“If crude oil price disap­points, this will jeopardise the capital adequacy ratios of many banks with significant exposure to the oil sector.

“It is expected that CBN’s policies will continue to be pro-growth in 2021. This will include sustaining the loan-to-deposit ratio policy, as well as a low interest regime environment which, for the banks, would mean survival of the fittest.

“The banking landscape is likely to witness significant change next year via restruc­turing. Already, a few of them are embracing the holding company structure.”

He added that chances are that “a number of banks in 2021 will recapitalise to meet up with the challenge of upscaling technology in response to the new normal of doing business occasioned by COVID-19”.

He continued: “So, the capital market will likely wit­ness some traction in primary market activities induced by the banking sector. It is also not unlikely to record some mergers and acquisitions this year, especially involving tier- 2 and tier-3 banks.

“The reopening of land borders is a welcome devel­opment and timely in view of the festive season. I expect inflationary pressure on food items to moderate in the coming weeks. I also expect smuggling to reduce while government revenue receives a boost.

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“However, with the rising cases of COVID-19, every ef­fort should be made to ensure that this does not present a health challenge.”

Ike Chioke, Group Manag­ing Director, Afrinvest West Africa Limited, who also ex­pressed his satisfaction at the performance of the banking industry in 2020, however, ex­pressed worry over the earn­ing profile of the industry, stating that Nigerian banks are struggling to meet CBN’s policies on loan-to-deposit ra­tio (LDR).

“The growth in loans has been driven by CBN’s mini­mum 65 percent LDR policy and we are likely to see indus­try total loans hitting N23.2 trillion at the end of the year and N24.4 trillion at the end of 2021,” Chioke stated.

Fitch Ratings, in a new re­port, ‘What Investors Want to Know: Nigerian Banks’, said Nigerian bank asset quality is expected to weaken over the next 12 months – 18 months.

It added that debt relief measures have prevented a material rise in impaired loans in 2020, but forecasts the average impaired loan ratio to range between 10 percent and 12 percent by 2021 year end as these measures end.

“Earnings are expected to recover gradually with the economy but remain exposed to further economic shocks from oil price volatility.

“Bank asset quality has historically fallen with oil prices; the oil sector repre­sented 28 percent of loans at end-1H20. Upstream and midstream segments (nearly 7% of gross loans) have been particularly affected by low oil prices and production cuts.

“However, the sector has performed better than expect­ed since the start of the crisis, limiting the rise in credit loss­es this year due to a combina­tion of debt relief afforded to customers, a stabilisation in oil prices, the hedging of financial exposures and the widespread restructuring of loans to the sector following the 2015 crisis.

“The credit loss ratio for the banks under our cover­age rose by 50 basis points to 110 basis points in 1H20 but remained well below the 380bp peak in 2016 (following the 2015 crisis).

“The low ratio mainly reflects regulatory forbear­ance on coronavirus-related restructured loans and asso­ciated provisioning policy being less than proactive,” Fitch added.




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