…says pandemic’ll dampen borrowers’ appetite for loans
iting economic headwinds occasioned by the coronavirus (COVID-19) pandemic, Fitch Solutions Group (FSG) has revised its forecast for Nigeria’s total banking asset growth to 5.3 per cent or N44.2 trillion this year.
The company, an affiliate of Fitch Ratings Incorporated, which stated this in its “Nigeria Banking & Financial Services Report/Q3 2020”, released at the weekend, also predicted average annual asset growth of 12.0 per cent to N63.8 trillion, for the sector by 2024.
It stated: “The coronavirus pandemic has already led governments around the world to shut down parts of their economies to limit the spread of the virus and protect their health services from being overwhelmed….
“With a limited lockdown enacted by the government across Nigeria weighing on consumer spending and economic activity, we have revised our economic outlook and now forecast a contraction of 3.9% in 2020, following growth of 2.3% in 2019. Weaker oil prices – also a result of slower global activity – will also weigh on economic expansion during 2020.”
Continuing, the company said: “The weaker economy and lockdown rules will weigh heavily on client loan growth as demand for credit is hurt by consumer and business uncertainty. We expect client loan growth will decline to 2.5% in 2020 from 14.0% in 2019. However, we forecast growth of 4.3% in 2021 as the economy begins to recover.”
Specifically, FSG said it expects the slump in oil prices and government measures to curb the spread of COVID-19 to significantly affect Nigerian loan growth this year.
Noting that the oil and gas sector, since 2015, has accounted for an average of 28.8 per cent of total commercial bank private sector loans, a development, which has left the banking sector highly exposed to oil price shocks, the company said that even though the Central Bank of Nigeria’s (CBN) introduction of a minimum Loan-to-Deposit Ratio (LDR) policy has led to a significant growth in commercial bank loans to the private sector, it expects “this growth to slow over 2020 as the economy returns to recession.”
It also pointed out that with reduced exports and a decline in foreign currency reserves likely to prompt the CBN to further weaken the naira towards N410/$1 by the end of 2020, “the weaker currency will contribute to inflation accelerating from an average of 11.4% in 2019 to 13.5% in 2020, weighing on purchasing power and credit demand.”
Besides, the company noted that the restrictions on public gatherings and uncertainty among consumers and businesses, due to the pandemic, are likely to dampen potential borrowers’ appetite for loans.
“Despite the CBN’s minimum LDR policy, banks are likely to struggle in issuing large amounts of credit, even if these results in further charges which threaten profitability. We forecast a deceleration of client loan growth from 14.0% y-o-y in 2019 to 2.5% in 2020, with risks weighted to the downside,” it stated.
In addition, predicting that an expected deterioration in asset quality this year will make banks more cautious about lending, Fitch Solutions said that even though there has been a decline in total Non-Performing Loans (NPLs) ratio in recent times, the trend is likely to be reversed this year due to the slump in oil prices.
It said: “We expect this trend to reverse in 2020 due to the oil sector’s contraction and the wider economic slowdown weighing on borrowers’ ability to fulfill loan obligations. In turn, deteriorating asset quality will elevate banks’ risk aversion, adding to headwinds facing credit growth this year.”
According to the firm, while increased government borrowing from domestic banks will help to support asset growth for the banking sector, it would also make debt servicing more costly for the government over the long term, limiting public investment and further hindering economic growth after 2020.
“There is also a significant risk for public borrowing to crowd out potential private borrowers from receiving credit when the impact of the virus eventually fades, hindering private consumption and investment and thereby constraining Nigeria’s economic recovery after 2020,” it said.
The FSG report shows that Access Bank is the largest lender in Nigeria by total assets, which tallied N7.1 trillion as of the end of December 2019.
Zenith Bank is the second largest lender with total assets of N6.3 trillion as of the end of December2019.
United Bank for Africa (UBA) is third with total assets tally of N5.6 trillion as of the end of December 2019, while FirstBank is fourth with N5.0 trillion.
Guaranty Trust Bank is Nigeria’s fifth largest bank, with total assets of N3.8 trillion as of the end of December 2019.
Meanwhile, FSG’s Banking Industry Risk Indicator (BIRI) shows Nigeria scoring 12.14 out of 100.
The firm explained that: “Nigeria’s Banking Industry Risk Indicator (BIRI) score of 12.14 (out of 100), is a reflection of high risk following weak economic growth in the wake of the 2016 recession and declines in oil sector revenue, alongside a weak regulatory environment and poor living standards. We rank each market out of 121, where first is lowest risk and 121st is highest risk. Nigeria is in 117th position.
“Nigeria’s BIRI scores show that its banking sector remains one of the most systematically fragile of the 121 banking sectors that we assess as part of our BIRI universe, posing significant risks to macro financial stability in the country.
“The structural backdrop of the banking sector has improved somewhat, with the BIRI having risen from 0.00 in Q4’17 to 12.14 in Q1’20. However, the latest score remains below the historical average of 21.72. Nigeria currently sits at 117th place out of the 121 countries that are captured in our rankings.”