Fitch Ratings Of Nigerian Banks

Fitch Ratings-Johannesburg/London-10 June 2009: Fitch Ratings says in a report published today that the excesses which have been built up in Nigerian banks in recent years is likely to negatively impact the financial performance of the sector for the next couple of years. In addition, the economic effects of the global credit crisis have also taken their toll, but the sector is relatively well positioned to absorb ongoing risks because of significantly higher minimum capital requirements that followed the system-wide consolidation in 2005 and 2006.

Fitch notes that 2008 marked the end of a period of rapid expansion for the Nigerian banking sector as the global credit crisis and lower oil prices caused a rapid decline in the operating environment. However, the system-wide consolidation of 2005/2006 should place the sector in a better position to absorb the risks that arise from slower growth and deteriorating asset quality indicators. Fitch believes that the recent trend of slower credit growth is a positive development for the sector.

“Despite the challenging operating environment, Nigerian banks continued to report strong earnings growth in 2008 on the back of rapid credit and deposit growth and Fitch expects earnings growth will continue in 2009, albeit at a slower pace,” says Anthony Walker, a Senior Director in Fitch’s Financial Institutions group. However it remains to be seen as to how Nigerian banks will address their share lending exposures in their financial statements. The agency considers that significant impairment charges could arise if these exposures become non-performing or if the value of collateral continues to remain below minimum coverage ratios”.

Fitch believes that the trend of rapid earnings growth since 2005 has masked the increasing levels of risk in the system, and higher impairment charges are expected as Nigeria’s economy slows. The rapid credit growth, which was the fastest of any country covered by Fitch during 2007 and 2008, lead to Fitch’s Macro Prudential Indicator (MPI) increasing to ‘3′ from ‘2′ in May 2009, to the highest risk category. The MPI aims to identify the potential for systemic stress.

Lending in various forms backed by shares has emerged as an important risk consideration following the significant deterioration in Nigerian share prices since early 2008. The Central Bank of Nigeria (CBN) estimates that the sector- wide exposure was between NGN800bn and NGN1,200bn as of end-2008, although estimates in the sector vary depending on the definitions utilised. However, for Fitch-rated banks, the exposures provided by management appear lower compared with the CBN’s estimates. At end-2008, the CBN allowed banks to reschedule these exposures, to prevent their classification as non-performing. The Fitch report shows that no agency-rated bank is expected to breach its minimum regulatory capital requirements, based on the agency’s calculations in a capital- sensitivity test for Fitch-rated banks and assuming a 50% provision for estimated exposures.

Given the present operating environment, Fitch expects that Nigerian banks will need to manage their costs and overhead structures more closely going forward. The sector is characterised by weak efficiency ratios which have resulted from an underdeveloped economic infrastructure and because many banks lack operational scale. This could lead to further market-driven consolidation during 2009 and 2010, as tightening liquidity, deteriorating asset quality and anticipated difficulties in raising new capital see certain banks being acquired by stronger institutions.