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Fitch ratings

Fitch says banks’ financial stress may continue till year end due to operating environment

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Fitch Ratings has explained that Nigerian banks will continue to face challenges this year, as many of the stress including non-performing loans and business squeeze in 2016 are persisting this year.

Many of the debtors fingered in bank’s NPLs are yet to make refunds, thus frustrating banks’ capabilities in venturing into mega businesses.

The agency has argued that banks faced multiple threats from the operating environment in 2016, including Nigeria sliding into recession, the economy continuing to suffer from low oil prices and severe shortages of foreign currency.

According to Fitch, several banks had struggled with declining operating profitability (excluding translation gains), sluggish credit growth, fast asset quality deterioration, tight foreign currency liquidity and weakening capitalisation, putting increasing pressure on their credit profiles.

The report said “The outlook for the rest of 2017 is not much brighter. We believe that the banks will continue to face extremely tight foreign currency liquidity despite the authorities’ best efforts to normalise the foreign-exchange (FX) interbank market and improve the supply of dollars”.

“Deliveries under the Central Bank of Nigeria’s (CBN) Forex forward transactions since June last year have helped the banks access dollars and reduce a large backlog of overdue trade finance obligations to international correspondent banks.

“Also, severity of the foreign currency liquidity issues, refinancing risk remains at the top of our perceived risks for the sector, especially as some banks have large Eurobond maturities in 2017/2018.

“Fast asset quality deterioration is in line with our expectations given the macro challenges and the continuing issues in the oil-sector. Oil-related impaired loans are high and this excludes large volumes of restructured loans. Other industry sectors contributing to bad loans include general commerce and trading, which have been affected by both the naira depreciation and foreign currency shortages.

It noted that slower economic growth and a lower risk appetite from banks will continue to translate into subdued credit growth and weak core earnings generation in 2017.

“Loan growth averaged 25 per cent in September last year, but this was due to the currency translation effect post devaluation as about half of sector loans are in foreign currency. Loan growth was negligible in constant currency terms. The banks’ 2016 profitability was underpinned by large translation gains booked on net long foreign currency positions following the naira devaluation,” Fitch said.


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