Fitch Ratings says in a newly published special report that the agency expects the financial performance of most of the Fitch-rated Nigerian banks to improve in 2011 as a result of lower impairment charges and funding costs. Over the medium-term, higher levels of credit growth, non-interest income and a greater cost management focus may support banks’ earnings as the competition for lower-cost deposits intensifies. 

The banks’ H111 results show a trend of improved, more stable earnings due to significantly lower impairment charges compared with 2009-2010. H111 results reflect some pent-up demand after prolonged uncertainty with cost management expected to take on increased focus.

Fitch notes that the asset quality indicators of Nigerian banks benefited from the sale of non-performing loans (NPLs) to the Asset Management Corporation of Nigeria during 2010 and H111. In addition, banks proactively used restructuring as a risk management tool to offset the negative impact of further NPL inflows on asset quality indicators.

Fitch notes that interbank liquidity tightened following the expiry of the Central Bank of Nigeria’s (CBN) interbank guarantee on 30 September 2011, which has been in place since the CBN’s special audit examination in 2009. However, the CBN has extended the guarantee to 31 December 2011 for the rescued Nigerian banks.

Fitch believes that Nigerian banks’ Tier 1 capital ratio may continue to be eroded by asset growth and low internal capital generation due to generous dividend policies. Considering the difficulties in raising fresh capital after the banking crisis, Fitch expects banks that hold higher levels of Tier 1 capital to be better placed to grow. Fitch believes that higher levels of capital are appropriate for Nigerian banks in light of the difficult local operating environment and credit concentrations as well as low impairment coverage ratios in the case of certain banks.

Source: Reuters