Key new forecasts for Nigerian banks as they navigate COVID-19 pandemic

There is no gainsaying the fact that the Nigerian banking sector will experience a slowed-growth phase this year, due to the COVID-19 pandemic that has ravaged the economy. Several reports have been pointing to this sad reality, with the latest being Fitch Solutions’ Nigeria Banking & Financial Services Report for Q3 2020.

The 57-paged report made some very vital forecasts for Nigerian banks, one of them being that high inflation and increased government borrowing will be responsible for much of the headwinds to banks’ profitability in the medium term. In other words, even though these banks are expected to grow in the medium term, the rate of growth will be determined by the effects of inflation and government’s borrowing from the banks.

“Nigeria’s banking sector is set to grow over the medium and long term, with a slowing of growth in 2020, supported by new lending requirements which will help boost growth. However, we expect high inflation and government borrowing to provide strong headwinds to growth over the medium term,” part of the report said.

In the meantime, Fitch Solutions has revised its earlier 2020 growth forecast for Nigerian banks, including their total banking asset growth. The decision to change the earlier forecast was made out of consideration for the economic shortfalls caused by the pandemic.

Note that Nigeria’s adoption of the IFRS 9 accounting standards for bad loans had considerably helped to improve asset quality in the banking sector. As a matter of fact, the ratio of non-performing loans (particularly those in the oil and gas sector) had declined by as much as 40.7% between Q4 2018 and Q4 2019. Unfortunately, the pandemic and the dramatic fall in oil prices earlier this year, all combined to negate the recent recorded success. This is why banks’ asset quality is projected to deteriorate this year, according to Fitch Solutions. This will also make banks become more cautious about lending.

“We continue to expect the changed minimum loan requirement to help drive client loan growth over the medium term. We have revised our growth forecast from the previous quarter and expect client loans to reach NGN14.9trn in 2020 with growth of 2.5% from 2019.

“Due to economic headwinds caused by the coronavirus pandemic, we have revised our forecast for total banking asset growth to 5.3% to NGN44.2trn. Over the medium term, we see average annual asset growth of 12.0% to NGN63.8trn by 2024.

“Following the adoption of the IFRS 9 accounting standards for bad loans, including the transition that will protect banks’ capital adequacy ratios, asset quality in Nigeria has improved. Nigeria’s ratio of non-performing loans (NPLs) tied to the oil sector declined by 40.7% from Q418 to Q419 as oil exports rose by 16.1% in 2019. In turn, the total NPL ratio fell from 11.7% to 6.0% over this period. However, due to the combined economic impact of the Covid-19 pandemic and lower oil price, we expect asset quality to deteriorate this year, making banks more cautious about lending.”

Below are the other key forecasts made by Fitch Solutions concerning the Nigerian banking sector:

  • At Fitch Solutions, we forecast a deceleration of client loan growth from 14.0% y-o-y in 2019 to 2.5% in 2020, before a small pickup to and 4.3% in 2021. Downside risks are elevated due to the Covid-19 pandemic and a weakened oil sector.
  • Demand for credit is set to weaken amid reduced economic activity and elevated uncertainty among consumers and businesses while deteriorating asset quality will make banks more cautious in issuing loans.
  • Increased government borrowing from domestic banks will help to support asset growth over the coming years. That said, there are risks of this crowding out private borrowers from receiving credit, hampering the economy’s long-term recovery.

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