An international ratings agency, Fitch Ratings, has explained that despite the good financial reports recorded by Nigeria’s commercial banks in their financial year ended 31 December, 2016, many of the lenders reported as healthy in the year under review had their net incomes lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June 2016.
The ratings agency also noted that turbulent operating conditions are still there to contend with, even though most of them weathered the storm in 2016.
Fitch Ratings believes that significant financial risks persist beyond reported figures, stressing that the banks made higher US dollar core income (in naira terms) and booked sizeable foreign-currency (FC) trading income, which offset rising impairment charges.
While the banks’ performance ratios improved in the year, we note that a substantial part of earnings were non-recurring and will be difficult to repeat.
According to the Fitch report, “Sector impaired loan ratios increased sharply but this was expected given the extent of Nigeria’s macro-economic challenges. 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.”
It further highlighted that capital buffers continued 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”, the rating agency disclosed.
The report, also pointed out that funding and liquidity risks continue to be high, while loans and deposits ratios have been rising but are not excessive.
“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”, it explained.