Fitch says Nigerian banks have a risk indicator of 12.14, explains why

A new report by Fitch Solutions titled “Nigeria: Banking & Financial Services Report Q3 2020” has revealed that the Banking Industry Risk Indicator (BIRI) in Nigeria stands at a score of 12.14 out of 100.

According to the report, the 12.14 BIRI score is indicative of high risk due to weak economic growth dating back to the 2016 recession. Other factors responsible for the poor score include declining oil revenue, an unfavourable regulatory environment, and a generally poor standard of living of most Nigerians.

The poor BIRI score also demonstrates that the Nigerian banking sector is still one of the “most systematically fragile” out of all the other banking sectors that were sampled in the report. Fitch Solutions also noted that this situation poses significant risks to Nigeria’s macro-financial stability. Part of the report said:

“Nigeria’s BIRI scores show that its banking sector remains one of the most systematically fragile of the 121 banking sectors that we assess as part of our BIRI universe, posing significant risks to macro-financial stability in the country. The structural backdrop of the banking sector has improved somewhat, with the BIRI having risen from 0.00 in Q417 to 12.14 in Q120. However, the latest score remains below the historical average of 21.72. Nigeria currently sits at 117th place out of the 121 countries that are captured in our rankings.”

Meanwhile, despite the poor BIRI score and an expected setback in 2020 due to COVID-19, the report noted that there is a bright future ahead for the Nigerian banking industry. According to the report, there will be a total banking asset growth of 5.3% to N41.9 trillion in 2020. In the medium term, Fitch Solutions forecasts a 10.9% growth to N56.9 trillion.

Nigeria’s top five banks — First Bank, UBA, GTBank, Access Bank, and Zenith Bank (FUGAZ) — are also expected to remain financially sound. Note that these banks account for half of Nigeria’s banking sector assets.

Note, however, that the anticipated recovery in the banking sector is highly dependent on how quickly the Nigerian economy begins to recover latest by Q4 2020. And even though mergers in the

“Our outlook for the growth of the Nigerian banking and financial services sector over the coming years – aside from a temporary slowdown in 2020 – is brightening as strengthening financial services sector regulations and softening liquidity constraints ensure that the sector as a whole remains stable. Despite significant pressure from non-performing loans since 2016, the systemically important top five banks, which together account for more than half of total banking sector assets, are financially sound, and we expect a broad continuation of sector rebalancing in line with the economic recovery, provided the economy begins to recover in Q420, in line with our central forecast.

“Consolidation through mergers is working to create the potential for financially stronger banks that can meet stricter capital adequacy requirements. On the downside, high inflation, lower oil prices and the expected economic contraction due to the effects of Covid-19 at a time when trade relations between the US and China continue to deteriorate sharply, will be a headwind to Nigerian banking and financial services sector development in the near term.”