December 8, 2020/Fitch Ratings

Nigerian bank asset quality is expected to weaken over the next 12 months-18 months, Fitch Ratings says in a new report, What Investors Want to Know: Nigerian Banks. Debt relief measures have prevented a material rise in impaired loans in 2020, but Fitch forecasts the average impaired loan ratio to range between 10%-12% by YE21 as these measures end. Earnings are expected to recover gradually with the economy but remain exposed to further economic shocks from oil price volatility.

Bank asset quality has historically fallen with oil prices; the oil sector represented 28% of loans at end-1H20. Upstream and midstream segments (nearly 7% of gross loans) have been particularly affected by low oil prices and production cuts. However, the sector has performed better than expected since the start of the crisis, limiting the rise in credit losses this year due to a combination of debt relief afforded to customers, a stabilisation in oil prices, the hedging of financial exposures and the widespread restructuring of loans to the sector following the 2015 crisis.

The credit loss ratio for the banks under our coverage rose by 50bp to 110bp in 1H20 but remained well below the 380bp peak in 2016 (following the 2015 crisis). The low ratio mainly reflects regulatory forbearance on coronavirus-related restructured loans and associated provisioning policy being less than proactive. In addition to solid revaluation gains and trading gains, the containment of credit losses will support profitability. With the expiry of relief measures and persistently weak oil prices, we believe the average credit loss ratio to lean somewhat toward the levels seen in 2016.