In a new report, Fitch Ratings has said Nigerian banks have enough capital and liquidity buffers to handle the current macroeconomic challenges, giving them room at their current rating levels.
The rating agency predicted that in 2023, banks would face deteriorating operating conditions due to factors such as high inflation, rising interest rates, and a lack of US dollars, as well as ongoing regulatory intervention and the potential for disruption due to the upcoming general election in February.
“We expect impaired loans ratios to increase moderately as borrowers contend with the challenging macro conditions. The restructuring of Ghana’s sovereign debt will add to asset-quality pressure at Nigeria’s largest five banking groups”.
Fitch forecasts a slight increase in profitability in 2023 because of higher revenues brought about by higher interest rates and revaluation benefits that will accompany a Nigerian naira depreciation, which will more than offset higher impairment charges and non-interest expenses.
It also noted that the highly demanding cash reserve requirement imposed by the Central Bank of Nigeria (CBN) would continue to drag on profitability significantly.
The naira may significantly lose value in 2023 as pressure on the currency continues.
As a result of their net long foreign currency (FC) positions and small FC-denominated risk-weighted assets, banks should be able to weather a devaluation with minimal impact on their capital ratios, according to Fitch. Meanwhile, the stricter FC lending standards implemented in recent years should keep asset-quality pressures under control.
With ongoing production problems and the rising cost of the oil price subsidies, Nigeria has seen the benefits of high oil prices for its foreign reserves fade. Fitch believes banks would have adequate FC liquidity buffers despite persistent shortages of US dollars, especially in light of the low volume of foreign debt maturing in 2023.
However, due to their substantial sovereign exposure, Nigerian banks are vulnerable to a negative sovereign rating move.
Given that they do most of their business in Nigeria, their ratings are capped at the sovereign “B-” level due to the country’s high insularity.