Moody’s Downgrades Outlook on Nigerian Banking Sector to Negative

• Moody’s Downgrades Outlook on Nigerian Banking Sector to Negative

Moody’s Investors Service, one of the world’s leading credit ratings, has downgraded its outlook on Nigeria’s banking system from stable to negative.

According to the credit rating agency, banks in Nigeria will face weakening loan quality and foreign-currency liquidity challenges, especially with the low oil prices now heavily impacting the oil sector where Nigerian banks preferred to have their loans.

About 27 percent of the total loans from the banking sector in 2019 went to the oil and gas industry, making the banking sector susceptible to the slump in oil price, Moody’s stated.

“We expect problem loans to rise to between 8 percent and 10 percent of total loans from 6 percent in December 2019, with risk tilted to the downside should the depressed oil price persist for more than a year. Loan restructuring and forbearance will lessen the impact of loan quality deterioration,” Moody’s said.

The agency explained that because the banking sector is highly dollarised, the recent devaluation of the Nigerian Naira will pressure both assets and liabilities of banks.

Also, the coronavirus pandemic has negatively impacted the Nigerian economy and expected to further worsen the already weak economic growth and rising costs of regulation.

The US-based firm predicted that banks’ profitability will weaken enormously due to low lending margins and higher costs. Accordingly, the agency expects return on assets to decline between 0.5 percent -1 percent this year, down from 2.5 percent achieved in 2019.

“We expect provisions to increase to 2.0 percent-2.5 percent of gross loans from about 0.5 percent in 2019 for the Moody’s-rated banks. Nigerian banks’ efficiency will also deteriorate as costs outpace revenue, raising their cost-to-income ratios. Nigerian banks were already inefficient compared with other large sub-Saharan banking systems, with an average cost-to-income ratio of close to 70 percent,” Moody’s said.

“Nigerian banks’ capital ratios are expected to decline but remain sufficient to absorb unexpected losses under our baseline scenario. We expect system-wide tangible common equity (TCE) to decline to 13 percent of risk-weighted assets (Moody’s adjusted) at year-end 2021 from 14 percent at the end of 2019.”