Nigerian Banks’ Robust Profitability Shields Them from Rising Credit Losses – S&P Ratings

According to a recent report from S&P Global Ratings, Nigerian banks are well-positioned to weather rising credit losses and meet higher capital requirements, with their robust profitability acting as a cushion against economic challenges.

The report highlights the strong earnings, high-interest margins, and diversified revenue streams of Nigerian banks, which are expected to continue driving their stability in 2024. S&P Global attributes this resilience to the impact of high interest rates set by the Central Bank of Nigeria (CBN), which have resulted in improved earnings, particularly through higher yields on government securities and loans.

In 2023, the CBN raised its monetary policy rate by a cumulative 850 basis points, pushing it to 27.25%. This increase has helped banks maintain strong profitability, despite credit risks and the broader economic landscape.

S&P also notes the growing digital capabilities of Nigerian banks, which have enabled them to diversify their income sources. In 2023, non-interest income accounted for around 50% of total income for rated banks, providing a buffer during times of economic slowdown and reducing the impact of rising credit losses.

The report further indicates that the CBN’s recent capital requirement hike will add an average of 400 basis points to the regulatory capital ratios of top-tier banks. This increase is seen as crucial in enhancing the banks’ ability to absorb credit losses, particularly in an environment fraught with high operating, credit, and currency risks. The higher capital levels will also better position Nigerian banks to compete with international and pan-African banking groups, especially in areas like trade finance.

Moreover, the recapitalization is expected to bolster not only top-tier banks but also mid-tier banks, enabling them to increase lending to businesses and consumers. This, in turn, could stimulate broader economic growth as banks expand their role in credit intermediation.

S&P’s report also reflects on the challenges posed by Nigeria’s volatile currency. The naira’s depreciation, while generating trading gains for banks with long USD-denominated asset positions, has eroded their capital when measured in USD. However, the CBN’s decision in February 2024 to limit banks’ net long foreign currency positions to 0% of shareholders’ equity (down from 10%) has tempered these gains.

S&P’s analysis of Nigerian banks’ capital strength includes its proprietary risk-adjusted capital (RAC) ratio, which adjusts for the distinct risk weights applied in its methodology. The report notes that Nigerian banks face exceptionally high economic risks, leading to higher risk charges and lower RAC ratios, which typically range from 3% to 5%, compared to regulatory capital adequacy ratios ranging from 16% to 30%.

Although improvements in RAC ratios following the recapitalization are unlikely to lead to immediate credit rating upgrades, some banks may see stronger stand-alone credit profiles (SACPs), reflecting their intrinsic creditworthiness. The SACPs of top-tier banks are already stronger than Nigeria’s sovereign rating, indicating their ability to maintain profitability and grow revenues despite economic cycles.

However, despite this relative strength, S&P does not rate Nigerian banks above the country’s sovereign rating of ‘B-/B’ on the global foreign currency scale and ‘ngBBB+/ngA-2’ on the national scale, due to the broader risks posed by Nigeria’s economic environment.

The outlook for most rated Nigerian banks remains stable, in line with the stable outlook on Nigeria’s sovereign rating, though Ecobank Nigeria Ltd. and First City Monument Bank face negative outlooks. The stability of bank ratings is expected to align with shifts in Nigeria’s sovereign creditworthiness, meaning significant improvements in Nigeria’s credit rating could influence the banks’ ratings.

In conclusion, Nigerian banks are well-placed to absorb rising credit losses, thanks to their strong earnings, high net interest margins, and diverse revenue streams. The CBN’s capital requirement increases will further enhance their ability to withstand economic volatility and remain competitive. While challenges such as currency fluctuations and high economic risks persist, Nigerian banks’ ability to generate consistent profits ensures they can navigate these turbulent conditions, contributing to the broader stability of Nigeria’s financial sector.