Nigerian banks’ Operating conditions to weaken over high inflation, rising interest rates and FX shortages

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Nigerian banks have sufficient capital and liquidity buffers to withstand prevailing macroeconomic challenges, providing headroom at their current rating levels, Fitch Ratings says in a new report.

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Operating conditions for banks will weaken in 2023 due to high inflation, rising interest rates and US dollar shortages, in addition to continued regulatory intervention and the potential for disruption caused by the 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 expects stronger revenues, resulting from higher interest rates and revaluation gains that will accompany a Nigerian naira devaluation, to counteract greater impairment charges and non-interest expenses, resulting in a modest improvement in profitability in 2023. The Central Bank of Nigeria’s (CBN) highly burdensome cash reserve requirement will remain a significant constraint on profitability.

The naira remains under pressure, raising the possibility of a material devaluation in 2023. Fitch believes banks’ capital ratios will be fairly resilient to such a devaluation due to their net long foreign currency (FC) positions and small FC-denominated risk-weighted assets, while tighter FC lending standards in recent years will help to contain asset-quality pressures.

The benefits of high oil prices for Nigeria’s external reserves have been eroded by persistent production issues and the increased cost of the oil price subsidy. Fitch expects US dollar shortages to continue but for banks’ FC liquidity buffers to remain sufficient, particularly considering limited external debt maturities in 2023.

Nevertheless, Nigerian banks’ ratings are sensitive to a negative sovereign rating action due to their high sovereign exposure. This, coupled with the concentration of operations within Nigeria, constrains their Viability Ratings at the level of the sovereign ‘B-’ rating.

Godwin Okafor
Godwin Okaforhttps://naija247news.com
Godwin Okafor is a veteran Financial Journalist, Internet Social Entrepreneur, and the visionary Founder of Naija247news Media Limited. With an extensive career spanning over 16 years in financial journalism, Godwin possesses a wealth of experience that seamlessly bridges both traditional and digital media landscapes. His journey in journalism commenced at Business Day, Nigeria, where he laid the foundation for his prolific career. In 2010, Godwin took a bold step by founding Naija247news Media, a platform that has since become a prominent player in delivering timely and accurate news. Educationally, Godwin Okafor holds a Bachelor's degree in Industrial Relations and Personnel Management from the prestigious Lagos State University, Ojo, Lagos. His commitment to continuous learning led him to the Lagos Business School, where he further honed his skills. Additionally, he is recognized as a Fellow of the University of Pennsylvania, having successfully completed the Wharton Seminar for Business Journalists. Throughout his illustrious career, Godwin has earned acclaim by winning numerous journalism awards, a testament to his dedication to excellence in reporting. Beyond his role as a Financial Journalist, Godwin Okafor wears the hat of the Chairman at Emmerich Resources Limited, the publishing entity behind Naija247news. His visionary leadership has played a pivotal role in shaping the media landscape and establishing Naija247news as a trusted source of information. Godwin Okafor's multifaceted expertise, commitment to journalistic integrity, and leadership in the realm of business journalism underscore his influential presence in both the media and entrepreneurial spheres.

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