Moody’s Investor Service, an international rating agency, last weekend made public its ratings of seven Nigerian banks.
The report is similar to the stance of the Central Bank of Nigeria that despite the headwinds being faced by the banking industry, there is enough buffer capacity to withstand the storm.
This is coming after some reports said the Nigerian banking industry is in a full blown crisis. Non-performing loans in the industry has risen to an average of 11 per cent with one of Nigeria’s top tier banks recording NPL level of 23 per cent.
While some banks may be in need of capital, the apex bank had assured that Nigerian banks are strong enough to absorb the losses that may arise from the non-performing loans. Non-performing loans in the industry had risen from 5.3 per cent as at the end of December 2015 to 11.7 percent at the end of June, way above the regulatory ceiling of five percent, according to
the Financial Stability Report issued by the apex bank.
Fitch, an international ratings agency, had earlier acknowledged that banks in the country had experienced a sharp rise in non-performing loans (NPLs), adding that other key concerns in the banking industry include forex scarcity, weakening capital adequacy ratios, and the sovereign’s ability to support banks, given its weaker financial flexibility.
Having downgraded some banks, the rating agency said: “If current challenges do not ease, the banks could face further downgrades.” Likewise, Arqaam Capital, a Dubai-based investment company, had said some banks were undercapitalized and close to being insolvent, an assertion which the apex bank declared as false.
In the report by Moody’s, Zenith Bank Plc was assigned Aaa.ng/NG-1; Guaranty Trust Bank Plc Aa1.ng/NG-1; Access Bank Plc Aa2.ng/NG-1; United Bank for Africa Plc Aa2.ng/NG-1; Sterling Bank Plc A1.ng/NG-1; and First Bank of Nigeria Limited A2.ng/NG-1. Bank of Industry was also assigned a national scale local currency issuer rating of Aa1.ng/NG-1.
Despite the rising non-performing loans in the Nigerian banking industry, Moody’s said the bank’s balance sheet and level of profitability as well as a strong asset base will keep them resilient to the downsides of the rising NPLs.
According to the rating agency, GTBank’s national scale ratings capture the bank’s resilient earnings generating capacity and robust capital buffers, which together provide a relatively thick cushion to withstand asset quality deterioration compared with domestic peers. The bank is said to have high liquidity buffers and a predominantly deposit funded balance sheet and early adoption of electronic banking platforms, which has allowed it to establish a robust retail franchise.
“These strengths are partially moderated by concentration risks in the bank’s loan book, including loans to the oil and gas industry (39.2 per cent of gross loans) and loans denominated in foreign currency (55.6 per cent of gross loans).”
GTBank’s exposure to the oil and gas sector is significantly higher than the banking system average of 29 per cent as at June 2016, exposing it to greater asset quality volatility than most peers. However, Moody’s notes the bank’s high level of profitability and capital, which provide large loss-absorbing buffers. As of June 2016, GTBank’s preprovision income to average total assets of 9.5 per cent and TCE of 18 per cent were the highest out of Moody’s rated Nigerian commercial banks.
With NPL level of 23 per cent, Moody’s said First Bank of Nigeria’s national scale ratings capture its high and resilient pre-provision profitability, with the first half of 2016 annualized pre-provision profits amounting to around 4.7 per cent of total assets; and stable, deposit-based funding structure and high liquidity buffers in local currency.
“These strengths are balanced against the bank’s deteriorating asset quality metrics, with NPLs accounting for around 23 per cent of gross loans as of June 2016 (against a system average of around 11.7 per cent) reflecting historically weak underwriting standards and the currently challenging operating domestic environment, as well as significant exposures to the troubled oil and gas sector and a high proportion (over 50 per cent) of foreign currency lending.
“These exposures make FBN relatively more sensitive to downside risk scenarios than its immediate domestic peers; tight foreign currency liquidity (borrowings from correspondent banks declined to N14 billion in 2015 from N188 billion in 2014); and modest capitalization buffers.”
Director of Banking Supervision of the CBN, Tokunbo Martins while dispelling fears on the rising level of NPLs in the industry said the banks have the capital base to absorb losses from the NPLs. “That certain banks are undercapitalized is certainly not true. That is not to say that the banking sector is not feeling the economic headwinds.
According to Martins, the focus should be on the capacity of the banks to absorb all the losses that will arise from those loans “and the answer is that yes they do. They have very strong capital buffers. The banks have very huge capacity to generate income so apart from the capital buffers that they already have.
“They have huge capacity to generate income to absorb those losses if they do arise. And those NPLs can they perform, yes they can because the underlying assets are still there and they are good. I think we should totally dispel or ignore this kind of story, it’s not one that we should take seriously at all,” she emphasized.
“The fact that the country has NPLs at a period like this should be expected and is not a thing that any jurisdiction should be demonized about. Other jurisdictions are also going through what we are also experiencing. There are countries that have NPLs as high as 15 per cent, some 30 per cent.”
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