Loan risks in banks to remain high, Moody’s, Fitch maintain

Please follow and like us:

  • 359
  • Share

Just like Fitch, Moody’s, another international rating agency, has held the view that loan risks in the country would remain high in a new report titled: ‘Banking System Outlook: Nigeria.’

This is coming a few days after the Nigeria Deposit Insurance Corporation (NDIC) once again reassured depositors and members of the public that Deposit Money Banks in Nigeria are safe and secure.

It also urged the banking public to ignore rumours of financial distress in some banks that are being circulated through text messages and social media.

The Managing Director/Chief Executive NDIC, Alhaji Umaru Ibrahim, said these rumours are meant to de-market those banks and destabilise depositors’ confidence in the banking system, adding that with NDIC’s strict supervision and regulation of the banking industry in collaboration with the CBN, depositors should have full confidence in the safety and security of their funds in the licensed banks.

Meanwhile, Vice President and Senior Analyst at Moody’s, Akin Majekodunmi, said “we expect asset quality to worsen slightly over the outlook period, as historically low oil prices, currency depreciation¬ and economic contraction experienced in 2016 continue to generate new nonperforming loans in 2017.”

Risks to asset quality are likely to remain high, with nonperforming loans (NPLs) likely to rise to between 14 and 16 per cent, from 14 per cent at end-2016. They should, however, reach a peak as write-offs, loan restructurings, and the strengthening economy takes effect.

“Nigerian banks should have sufficient capital to absorb expected losses, though Moody’s expects system-wide tangible common equity (TCE) to only decline slightly to 14.1 per cent of adjusted risk-weighted assets by year-end 2018 from 14.7 per cent at the end of 2016. The slight shift is primarily due to increased loan-loss provisions and the effect of further expected naira depreciation on the balance of risk-weighted assets denominated in foreign currency.

READ ALSO:  WHO revises childbirth guidelines to curb surge in caesarean delivery

“Moody’s also sees the banks’ loan-loss provisioning weakening their net profitability. The rating agency expects return on assets to decline to around one per cent in 2017, from 1.3 per cent at the end of 2016 on account of high provisioning costs at around three per cent of gross loans.

“System-wide pre-provision income will likely remain robust, however, at around four of average total assets, supported by high yields on government securities and profits on open foreign currency positions,” the agency added.

However, Moody’s Investors Service maintained its stable outlook on the Nigerian banking system, reflecting the rating agency’s view that acute foreign-currency shortages in the country will gradually ease.

“With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our outlook period,” Majekodunmi said.

Finally, Moody’s considered there to be a high probability of the Nigerian government supporting banks in case of need, given the significant consequences of a bank collapse to both the payments system and the wider economy.

Similarly, despite positive financial results for 2016 posted by Nigerian banks notwithstanding the turbulent operating conditions, global rating agency, Fitch Ratings, believes that significant financial risks persist beyond the reported figures.

Fitch in its assessment of the banks’ 2016  earnings obtained , pointed out that the healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June.

But, “For 2017, we believe there will be a slight easing on the banks’ operating environment reflecting some early-stage improvements on the macro-economic front. We expect banks to remain profitable despite still modest credit growth and forecast further asset-quality deterioration, but at a slower pace. The big question is whether there will be improvement in FC liquidity, but this to a large extent depends on factors beyond the banks’ control,” Fitch stated.

READ ALSO:  President Buhari summons emergency security meeting

It also stated that asset-quality metrics would have been even worse if not for high levels of restructured loans, particularly to the troubled oil sector. Low reserve coverage and high levels of FC lending add to our concerns about the banks’ long-term financial health. Capital buffers continue to be weak despite relatively high reported capital adequacy ratios (CARs).

“We maintain that ratios are vulnerable to even modest shocks for some banks. Year-end CARs declined due to the twin pressures of inflated risk-weighted assets (due to the revaluation of US dollar assets) and rising impairment charges, although this was partially offset by strong retained earnings, which benefitted from the revaluation gains. Funding and liquidity risks continue to be high. Loans/deposits ratios have been rising but are not excessive,” Fitch added.

They noted that the primary concern in the industry relates to FC liquidity, which it stated remained tight despite the authorities’ attempts to normalise the foreign-exchange interbank market.

 

The post Loan risks in banks to remain high, Moody’s, Fitch maintain appeared first on Tribune.

Facebook Comments

Please follow and like us:

  • 359
  • Share

Leave a Reply

Your email address will not be published. Required fields are marked *