Nigerian Banks’ Earnings Outlook Remains Positive Amid Macroeconomic Challenges

Despite facing significant macroeconomic challenges, Nigerian banks are poised for positive earnings growth, according to a premium report obtained by MarketForces Africa from Moody’s.

The global rating firm revised its outlook for the Nigerian banking sector from stable to positive, citing expectations of robust profitability despite prevailing economic headwinds.

Moody’s anticipates that Nigerian banks will experience strengthened profitability in the coming quarters, driven by several factors including higher interest rates, increased fees and commissions, and successful cost reduction initiatives.

However, the report acknowledges potential challenges such as higher provisions for loan quality deterioration, particularly among foreign-currency borrowers impacted by currency devaluation and inflationary pressures.

While Nigeria’s GDP growth rate is projected to be modest at 3.2% and 3.0% for 2023 and 2024 respectively, analysts highlight the weaker growth prospects compared to pre-2016 oil price shock levels. This is attributed to factors such as low oil production and foreign currency shortages.

Furthermore, Moody’s underscores concerns about rising inflation and currency depreciation straining borrowers’ repayment capacity, especially those with foreign-currency loans. Despite these challenges, Nigerian banks have implemented risk management strategies to mitigate risks associated with foreign-currency loans.

The report also highlights the substantial exposure of Nigerian banks to sovereign debt holdings, which represents 20% of aggregate total assets as of September 2023. While this poses a clear vulnerability, the positive outlook on the sovereign rating is expected to benefit the banks.

Capital adequacy remains solid for most rated banks, although some experienced a decline in capital ratios due to currency devaluation. Moody’s expects the Central Bank of Nigeria (CBN) to prioritize capital-raising measures across the industry, particularly in light of ongoing discussions regarding Basel III capital standards.

Despite foreign currency liquidity challenges, Nigerian banks have retained adequate access to foreign currency, primarily driven by low-cost household deposits. The likelihood of government support in case of need remains high, reflecting the government’s track record of bank support and actions to preserve banking sector stability.

Overall, the positive outlook for Nigerian banks reflects Moody’s confidence in the sector’s resilience and ability to navigate prevailing economic challenges, with potential for further improvement in the event of a sovereign rating upgrade.