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Fitch Ratings: Nigerian Banks at Severe Risk from Oil Price Slump, Coronavirus

Published 01/04/2020, 12:28
Updated 01/04/2020, 12:30
Fitch Ratings: Nigerian Banks at Severe Risk from Oil Price Slump, Coronavirus


(The following statement was released by the rating agency)


Fitch Ratings-London-April 01: Nigerian banks' credit profiles face severe risks
from the oil price slump and operating environment disruption due to the
coronavirus pandemic, Fitch Ratings says. Asset quality deterioration linked to
high exposures to the oil and gas sector is the biggest threat to ratings.

Operating environment risks inevitably rise in Nigeria when oil prices fall. Oil
exports represent 95% 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 (the
average Stage 3 loans ratio for Fitch-rated banks was 5.7% at end-2019) 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
(see href="https://www.fitchratings.com/research/banks/fitch-downgrades-3-nigerian-ba
nks-to-b-places-all-10-banks-on-negative-watch-26-03-2020">here /a ). 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.

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