The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Nigeria over the next 12-18 months.
Moody’s report, entitled “Banking System Outlook: Nigeria,” is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.
“With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our
outlook period,” says Akin Majekodunmi, Vice President and Senior Analyst at Moody’s. “However, 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.”
The rating agency expects Nigeria to see real GDP growth of 2.5% in 2017 and 4% in 2018, after a 1.5% contraction last year, as noted in March 2017. The revival will be supported by government measures to expand non-oil sectors and its commitment to fund large infrastructure projects, as well as by a partial rebound in global oil prices from lows last year.
Risks to asset quality are likely to remain high, with nonperforming loans (NPLs) likely to rise to between 14-16% from 14% 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% of adjusted risk-weighted assets by year-end 2018 from 14.7% 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.
Moody’s also sees the banks’ loan-loss provisioning weakening their net profitability. The rating agency expects return on assets to decline to around 1% in 2017 from 1.3% at the end of 2016 on account of high provisioning costs at around 3% of gross loans. System-wide pre-provision income will likely remain robust, however, at around 4% of average total assets, supported by high yields on government securities and profits on open foreign currency positions.
Lastly, Moody’s considers 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.