Nigerian
banks’ credit profiles face severe risks resulting from the slump in oil price
as well as the disruptions in operating environment due to the Coronavirus
(COVID-19) pandemic, Fitch Ratings has said. The global fiscal and financial
rating firm explained in a release yesterday that the banks’ asset quality
deterioration is linked to high exposures to the oil and gas sector and thus
remains the biggest threat to ratings. It also added that the Nigerian economy
faces threat of recession as a result of these developments. Fitch, in a report
posted on its website stated: “Oil exports represent 95 percent of the
country’s export revenue and strongly influence the broader economy. Falling
oil revenue may also lead to further currency devaluation. “Accordingly, the
slump in oil prices raises the risk of a recession. Operating environment risks
are compounded by economic and financial market disruption amid measures to
counter the pandemic, putting pressure on all borrowers
“Forbearance
measures announced by the Central Bank of Nigeria (CBN) will provide some
relief to businesses and households and help the flow of credit into the
economy. “This will support reported asset quality metrics in the short term
but asset quality could deteriorate significantly depending on the duration and
severity of the oil price shock and Coronavirus turmoil.” Fitch recently
downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’
from ‘B+’ and placed all 10 Nigerian banks’ Viability Ratings and IDRs on
Rating Watch Negative, reflecting our expectation that banks will face material
pressures from the weaker operating environment in the coming months The latest
Fitch report stated further, “The resilience of banks’ asset quality,
profitability and capital during the economic downturn will influence, among
other considerations, how we resolve the Rating Watches. “The oil and gas
sector represented about 30% of Nigerian banks’ gross loans at end-3Q19.
Accordingly, loan quality is highly correlated to oil prices, as seen during
previous oil price shocks in 2008-2009 and 2015-2016. Impaired loans have
decreased since 2017 due to rising oil prices as well as recoveries and
write-offs, but the current shock could lead to a significant increase. Any
closures of oil fields due to a collapse in global oil demand would exacerbate
the impact”.
0 Comments