Fitch Predicts 2015 Negative Sector Outlook for Nigerian Banks

By Peter OBIORA InvestAdvocate

Lagos (INVESTADVOCATE)-Global rating agency, Fitch Ratings on Thursday predicated a negative sector outlook for Nigerian banks in 2015, according to its latest report.

According to Fitch, oil price shock and the resulting policy moves leads to a negative sector outlook for the Nigerian banks. The agency’s view of the sector next year is a reflection of the challenging and volatile operating environment due to low oil prices (Fitch forecasts Brent crude to average USD83/barrel in 2015) and its impact on business and the economy.

Apart from the sliding world oil prices, Fitch says recent policy actions by the Central Bank of Nigeria (CBN) to devalue the naira, raise interest rates and increase reserve requirements (CRR), will lead to the deterioration of banks profitability, asset quality and capital ratios in 2015.

‘’We are forecasting bank profitability, asset quality and capital ratios to deteriorate in 2015,’’ Fitch said.

The world rating agency says that the weaker operating environment may not necessarily have rating implications. ‘’Six Nigerian banks, First Bank of Nigeria, United Bank for Africa, Diamond Bank, Union Bank, Fidelity Bank and First City Monument Bank, have IDRs driven by the probability of state support,’’ it added.

Fitch says the ability of the authorities to support domestic banks is limited by Nigeria’s sovereign rating (‘BB-‘/Stable). ‘’The willingness to support remains strong and has been clearly demonstrated in the past,’’ it affirmed.

It disclosed that the Stable Outlook on these banks’ IDRs reflects the Stable Outlook on the Nigerian sovereign. ‘’These banks’ IDRs would only be impacted by a multi-notch downgrade of the sovereign rating, which is unlikely in the near term,’’ it said.

Also, Fitch says three (3) Nigerian banks, Zenith Bank, Guaranty Trust Bank and Access Bank have IDRs driven by their intrinsic creditworthiness as defined by the Viability Ratings (VR). ‘’As for other Nigerian banks rated by Fitch, their low VRs (generally in the ‘b’ range) already factor in the tough operating environment in Nigeria. As such, the macro implications of the current low oil prices and policy moves are unlikely to materially impact VRs and indirectly their IDRs in the near term,’’ Fitch noted.

The global rating agency further affirmed that banks are generally well positioned for the rate rise as they can re-price loans and benefit from higher yields on treasury bills to offset the increase in the cost of funding. ‘’However, the positive impact on the net interest margin (NIM) and core earnings will be limited due to the simultaneous hike in the reserve requirement,’’ Fitch said.

It also noted that profitability will also be affected by slower business growth and higher loan impairment charges. ‘’Other profitability constraints remain, such as the revised rules on banking charges and higher regulatory levies enforced in 2013,’’ the rating agency added.

Fitch also projected that non-performing loans (NPLs) will rise a above Nigeria’s central bank’s informal cap of 5 percent; but below 10 percent by 2015 end. ‘’This reflects high loan concentrations as well as emerging risks, particularly in the oil and gas and power sectors,’’ Fitch said.

According to Fitch, these factors add more pressure on capital than previously anticipated. ‘’We are, therefore, further revising our forecasts and expect a 300-500bps decline in regulatory total capital ratios in 2015,’’ it affirmed.

Fitch also said the factors in the shift to Basel II and the CBN’s revised regulatory capital computation rules. Tier 1 capital ratios are very likely to fall below 15 percent, which is low in the Nigerian context.

‘’We expect liquidity to remain tight in 2015, considering funding pressure. New limits on foreign currency borrowing and net open positions are likely to reduce US dollar debt issuance. Despite increasing competition for low cost and stable deposits, customer deposit growth should remain healthy. Therefore, loans to deposit ratios are likely to remain below 100 percent. We also note regulatory liquidity ratios (set at a minimum 30 percent) are declining across the sector which is a further concern,’’ the global rating agency said.

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