Global rating agency, Fitch Solutions, says high inflation and increased government borrowing occasioned by the COVID-19 pandemic will be responsible for much of the headwinds to Nigerian Banks’ profitability in the medium term.
In a 57-page report titled Nigeria Banking & Financial Services Report for Q3 2020, Fitch stated that though these banks are expected to grow in the medium term, the rate of growth will be determined by the effects of inflation and government’s borrowing from the banks.
The report stated that due to COVID-19 pandemic and a weakened oil sector, there would be a deceleration of client loan growth from 14.0 per cent y-o-y in 2019 to 2.5 per cent in 2020, before a small pickup to 4.3 per cent in 2021.
Similarly, the demand for credit would weaken amid reduced economic activity and elevated uncertainty among consumers and businesses while deteriorating asset quality will make banks more cautious in issuing loans.
In the meantime, Fitch Solutions has revised its earlier 2020 growth forecast for Nigerian banks, including their total banking asset growth. The decision to change the earlier forecast was made out of consideration for the economic shortfalls caused by the pandemic.
Nigeria’s adoption of the IFRS 9 accounting standards for bad loans had considerably helped to improve asset quality in the banking sector. As a matter of fact, the ratio of non-performing loans had declined by as much as 40.7 per cent between Q4 2018 and Q4 2019.
Unfortunately, the pandemic and the dramatic fall in oil prices earlier this year, all combined to negate the recent recorded success. This is why banks’ asset quality is projected to deteriorate this year, according to Fitch Solutions. This will also make banks become more cautious about lending.
“We continue to expect the changed minimum loan requirement to help drive client loan growth over the medium term. We have revised our growth forecast from the previous quarter and expect client loans to reach NGN14.9trn in 2020 with growth of 2.5 per cent from 2019.”