Nigeria lenders NPLs moving southwards still exposed to cyclical oil shocks- Moody’s

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Moody’s Investors Service, a global credit rating agency, says Nigeria’s financial industry, on the area of asset risk, despite the fact that banks’ non-performing loans have been moving southwards, the lenders are still largely exposed to the cyclical oil and gas sector

“So if oil prices come down the banks are still going to be affected and are also exposed to foreign currency loans.”

The American rating agency commented on the recent policies by the Central Bank of Nigeria (CBN) designed to spur economic growth through increased lending to the private sector will be constrained by the weakness of the economy.

Moody’s in an interview with Newsmen on Thursday said the new directives would not be able to offer much support to the economy due to its current sluggish growth.

“It will be difficult for the recent policies by the central bank to really have a strong impact on the economic growth just by pushing the banks to lend. This is because the banks are taking on more risks due to the slow economic growth,” Aurelien Mali, vice-president senior credit officer, Sovereign risk group at Moody’s Investors Service, told BusinessDay in agency’s London office.

The Nigerian economy continued to expand at a sluggish rate in the third quarter of 2019 after state data agency, the National Bureau of Statistics (NBS), reported a 2.28 percent growth for the period.

While this is the fastest growth in four quarters, the GDP rate is lower than the country’s population growth rate of 2.6 percent. This means that since 2015 Africa’s largest economy has been producing more people than it can feed.

The Central Bank of Nigeria (CBN) recently adopted the Loan-to-Deposit Ratio (LDR) policy to discourage banks from investing in government securities and force them to expand lending to the private sector to ramp up the struggling economy and boost jobs.

To that effect, the industry regulator raised the LDR of banks to 65 percent, after the September 30 deadline given to the banks to meet its 60 percent directive.

Nigerian banks have advanced loans to the private sector by well over a N1.1trn just in 3months to October following the 60-65percent LDR set by the central bank, according to figures from the regulator.

According to Peter Mushangwe, an analyst at Moody’s, the new derivatives from the central bank particularly the 65 percent loan to deposit ratio target, and the fact that banks are no longer allowed participation in some auctions in order to push them to lend to the household and SMEs, “is credit negative from the perspective that the economy is yet to grow at a very strong pace”.

The CBN recently directed deposit money banks to exclude individuals and domestic corporates from participating in its Open Market Operations (OMO), a move that industry analysts say was directed at increasing investment in the private sector.

OMO is a financial instrument used by the central bank to sell treasuries bills and other instruments. Over the years, banks in Nigeria used the treasury bill market to keep their cash reserves high.

Before the recent policy implementation by the apex bank, it warned that it would sanction deposit money banks and their customers who abuse the new LDR measure by diverting the loans to treasury bills and OMO.

Isaac Okorafor, director, corporate communication had said on the side lines of the International Monetary Fund (IMF)/World Bank annual meetings in Washington, DC that banks and customers caught doing that would be punished and blacklisted for arbitrage.

“The loans banks will be writing under the circumstance will be risker. We also think if the banks do not meet the required LDR, they will be penalized and that will obviously drain liquidity from the system,” Mushangwe said.

“Overtime if it is maintained, it could lead to a cost of fund for the banks because they will be competing for the same set of deposits.”

Although from another perspective, the credit rating agency said the banks will tend to lend more to SMEs, household, and this can provide the banks with better margins, even though it is riskier for them.

“It will be difficult for the policies to impact economic growth,” Moody’s emphasised.

However, banks’ investment in technology is seen by the American credit rating agency to become “credit positive” for them even though in the short term, it will put pressure on their cost.

“It will reduce the cost of building and running branches, and it will even reduce the cost of staff. This will be credit positive for them,” Mushangwe said.

Moody’s maintained its stable outlook for the Nigerian banking industry.

ENDURANCE OKAFOR

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