Global Banking Outlook 2020: Nigeria’s slow economic recovery seen stall banking sector’s recovery

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Key takeaways
−Most banks should contend with challenging credit conditions in 2020 at current rating levels.
−The economic outlook is delicately poised. Key risks for banks include the spillover effects on assetquality from slower economic conditions and a weaker outlook for corporate earnings.
−Lower-for-longer rates may avoid a global recession in 2020 but will anchor banks to lowerprofitability and test business models.
−Banks are vulnerable to U.S. dollar outflows, given their high net external debt.

−Additional capital requirements are unlikely to affect top-tier banks.

Key credit drivers

S&P Global Ratings expects most banks globally to be able to buffer challenging credit conditions in 2020. But there are downside risks that could disturb the relative calm. A scenario of slower economic growth–primarily driven by the U.S.-China trade and strategic confrontation–and a weaker outlook for corporate earnings may ultimately take its toll on bank asset quality and test ratings at current levels.

Moreover, our current expectations at this late stage of what has been an extraordinarily long credit cycle is that the negative turn we anticipate–whether in 2020 or now punted further afield following recent dovish sentiment by central banks–will be orderly; i.e., relatively moderate and gradual.

A significant and abrupt cyclical downturn affecting bank credit could cause a negative step change in our view. While not our base case, this adverse scenario is far from implausible noting the high volume of credit working its way through and around the global banking system.

In Nigeria’s case, high dependence on the oil sector. Nigeria’s economy remains largely dependent on the hydrocarbon industry, accounting for 90% of exports and at least half of fiscal revenues. Combined with its sensitivity to currency depreciation and high inflation, this exposes the banking sector to high
economic imbalances and short credit cycles.


Loan book concentration exacerbates the risks.
Banks are vulnerable to asset-price shocks and asset-quality problems that are further exacerbated by high single-name and industry concentration risks. In addition, governance issues in the wider economy, including both public and private sectors, could create systemic risks when the cycle turns.

Reliance on external funding. Nigerian banks face additional liquidity risks because of the dual-currency nature of their balance sheets, and high net external debt. This could cause potential pressure on their U.S.-dollar liquidity when foreign currency reserves drop because of declining oil prices.

Key assumptions

Slow economic growth. We project real GDP growth will average 2% in 2019-2020. We forecast the banking sector’s credit losses will normalize at about 2% amid broadly flat or marginally positive credit growth in real terms in the same period.


Muted loan growth.
We anticipate muted real credit growth in 2019-2020, supported by consumer lending. Asset quality and profitability will continue to improve across the sector as banks’ nominal loan growth accelerates in 2020.

High external debt. Gross banking sector external debt will remain high, above 50% of total loans, amid the stabilization of the naira exchange rate.

What to look for over the next year
We expect stable profitability. We expect the overall stability of the banking system and profitability will continue to strengthen in 2020, on the back of more stable macroeconomic conditions.

Distortions created by the central bank are likely to persist.
Additional capital requirements to mitigate the effect of the naira devaluation in 2017 will largely affect smaller banks. We expect top-tier banks will continue to manage their Tier 1 ratio at around 18% on average. This could spur some further consolidation among small banks as scaling business becomes essential. The 1% capital charge for domestic systemically important banks is likely to be reintroduced as well.


A higher focus on retail.
We could see greater focus on the retail space as banks leverage their digital transformation. In addition, the government plans to introduce a single national identifier for the population and to allow banks to access to customers’ assets across the system in case of nonpayment.

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