Moody's: Foreign currency pressures will stabilise but loan risks will remain high

4700943662 cc35a88bd8 b(Image source: Shardayyy/Flickr)Moody's Investors Service has analysed the Nigeria banking system in its latest Banking System Outlook

Moody's outlook for Nigeria’s banking system is stable. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12 to 18 months. The stable outlook for the Nigerian banking system reflects Moody's expectation that acute foreign-currency shortages will gradually ease as Nigeria's oil and gas export revenues stabilise, though loan risks will remain high. This is a summary of Moody's outlook.

The economy will recover. Moody's forecast real GDP growth of 2.5 per cent in 2017 and 4 per cent in 2018, after a 1.5 per cent contraction last year. Lending growth (adjusted for naira depreciation) will rise to around 5 per cent after contracting 6 per cent last year. High inflation and dollar shortages will start to ease but will continue to restrain Nigeria's import-dependent economy over the outlook period.

Loan risks will remain high. Nonperforming loans (NPL) will rise marginally to between 14-16 per cent from 14 per cent at end-2016 but should reach a peak as write-offs, loan restructurings, and the strengthening economy takes effect. The main risks will come from loans to the oil and gas sectors, to import-dependent borrowers and from foreign-currency loans.

Capital buffers will provide solid loss absorption. Moody's expect system-wide tangible common equity (TCE) to decline slightly to 14.1 per cent of adjusted risk-weighted assets by yearend 2018 from 14.7 per cent at the end of 2016, primarily because of increased loan-loss provisions and the effect of further expected naira depreciation on the balance of risk-weighted assets denominated in foreign currency. Profits will remain sufficient to absorb expected losses.

Dollar shortages will gradually ease. Nigerian banks benefit from stable deposit funding and ready access to local currency. They will continue to face dollar shortages, but these will gradually ease as economic growth accelerates and oil prices stabilise. The central bank has already increased the availability of dollars to the private sector, via the banks.

Loan-loss provisioning will weaken net profitability. Moody's expect a return on assets to decline to around 1 per cent in 2017 from 1.3 per cent at the end of 2016 on account of high provisioning costs at around 3 per cent of gross loans. System-wide pre-provision income will remain robust, however, at around 4 per cent of average total assets, supported by high yields on government securities and profits on open foreign currency positions.

The full Moody's outlook can be viewed here

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