Nigerian political stability and economic growth after a loan clean-up by a state company created to buy bad debt will spur expansion in the country’s banking industry this year, according to Standard & Poor’s.

“Nigerian banks have good prospects in 2013 thanks to strong economic growth and currently broad political stability,” S&P analysts, led by Matthew Pirnie in Johannesburg, wrote in a report today. “We believe the banks will enter an expansionary phase in 2013, spurred by increasing competition and relatively clean balance sheets.”

Africa’s biggest oil producer and most populous nation implemented banking reforms following a debt crisis in 2008 and 2009. The central bank fired eight chief executives of the country’s 24 banks and set up the Asset Management Corp. of Nigeria to buy lenders’ non-performing loans and stabilize the industry. Amcon spent 5.6 trillion naira ($35 billion) in 2011 to acquire the debt, Chief Executive Officer Mustafa Chike-Obi said in December.

Nigeria’s economy will probably expand 6.8 percent this year, compared with an estimated 6.6 percent in 2012, the National Bureau of Statistics said last month.

For lenders, “such expansion carries risks, however, including a dilution of capital if loans are extended rapidly,” said S&P. “Credit risks may mount, too, exacerbating the risk of foreign-currency lending, real-estate price bubbles, and corporate concentrations, although we don’t believe these risks are likely to materialize this year.”

The Bloomberg Nigerian Stock Exchange Banking 10 Index (NGSEB10), which tracks the performance of the West African nation’s largest lenders by market value, has advanced 24 percent this year and gained 1.1 percent to 422.30 by the 2:30 p.m. close in Lagos, the commercial capital.

“Corporate governance is a long-standing constraint on ratings, and low transparency would in our view raise risks,” according to S&P. “Nigeria’s narrow economic structure also exposes the economy, and the banking sector, to a fall in oil prices or production.”

Source: Bloomberg (By Chris Kay)