Fitch predicts more operating challenges for banks in 2017

Fitch in its new ratings on Wednesday has affirmed that Nigerian banks will continue to face challenges in 2017, following an extremely difficult 2016.

The new ratings, also disclosed that Non Performing Loans (NPLs) ratio in Deposit Money Banks (DMBs) could rise from 10 per cent to 12per cent by end of first half of 2017 (H1), a total percentage lower than the Central Bank of Nigeria (CBN’s ) reported figure for the entire sector.

However, it stated that banks faced multiple threats from the operating environment in 2016, including Nigeria sliding into recession, the economy continuing to suffer from low oil prices and severe shortages of foreign currency (FC).

The report, also pointed out that commercial banks struggled with declining operating profitability (excluding translation gains), sluggish credit growth, fast asset quality deterioration, tight FC liquidity and weakening capitalisation, putting increasing pressure on their credit profiles.

According to the Fitch report, “the outlook for the rest of 2017 is not much brighter. We believe that the banks will continue to face extremely tight FC liquidity despite the authorities’ best efforts to normalise the foreign-exchange (FX) interbank market and improve the supply of US dollars. “

It explained that deliveries under the Central Bank of Nigeria’s (CBN) FX forward transactions since 1H16 have helped the banks access US dollars and reduce a large backlog of overdue trade finance obligations to international correspondent banks.

Oil-related impaired loans (NPLs) are high and this excludes large volumes of restructured loans. Other industry sectors contributing to NPLs include general commerce and trading, which have been affected by both the naira depreciation and FC shortages.

As a one-off policy change, the CBN allowed banks to write off all fully reserved NPLs by end-2016. Together with significant loan restructuring (particularly in the oil sector), this will ease pressure on NPLs for now, in our view. Slower economic growth and a lower risk appetite from banks will continue to translate into subdued credit growth and weak core earnings generation in 2017.

Loan growth averaged 25per cent in 9M16, but this was due to the currency translation effect post devaluation as about half of sector loans are in FC. Loan growth was negligible in constant currency terms. The banks’ 2016 profitability was underpinned by large translation gains booked on net long FC positions following the naira devaluation.

Excluding these, some banks would have reported a significant fall in operating income. Regulatory capital ratios are high from a global perspective, but remain under pressure due to inflated risk-weighted assets (due to the FC translation effect) and lower core retained earnings.

“In our view, there is a limited margin of safety as some banks could very easily breach minimum regulatory requirements in the event of further naira depreciation and/or weaker asset quality. The Long-Term IDRs of all banks’ are in the ‘B’ range, indicating highly speculative fundamental credit quality.”

Following a reassessment of potential sovereign support available to the banks in 2016, Fitch believes that sovereign support cannot be relied on given Nigeria’s (B+/Negative) weak ability to do so in FC. As a consequence, we removed sovereign support from the Long-Term IDRs.

“Overall, the largest Nigerian banks with stronger and more diverse business models, high revenue-generating capacity and stronger liquidity profiles appear to be coping better than smaller banks on most metrics. However, tail risks remain high for all banks due to their sensitivity to concentration risk”, it stated.