Moody’s 2018 Outlook on 8 Nigerian Banks, Negative!

Moody’s in early November downgraded Nigeria’s Sovereign Credit Rating to B- with a stable outlook on the back of increasing borrowing by the Federal Government, unilateral sources of revenue and uncertainty of the oil market, it also downgraded 8 Nigerian Banks on the back of their exposures to Government Securities. For Instance, Exotix Capital was quoted in a research that say 965bn in cash is sitting in the vaults of Guaranty Trust Bank and rather than issue out loans to tier 1 companies who qualify for short term funds to run their projects, the bank rather prefers to invest money in open money market security like treasury bills of the Central Bank with no risk exposure and a guaranteed return at the end of the day.

Moody’s states that its pertinent the Central Bank of Nigeria consider rebalancing the gearing ratio of the Banks by recapitalizing the banks to balance the ratio of Deposits to Capital Adequacy. In a statement Constantinous Kypreos, A Moody’s Senior Vice President said “Although African banks will maintain solid capital and local currency liquidity buffers in 2018, macroeconomic conditions will remain difficult in a majority of African countries, Economic growth will remain below historical levels, while political uncertainty will dampen confidence and governments’ capacity for fiscal stimulus will be limited.”

On a macroeconomic front it said “Economic growth is rebounding despite fiscal challenges, reflecting increased oil production and buoyant services. Banks will maintain high local currency liquidity and good capital buffers. Loan quality and foreign currency liquidity pressures remain, but are receding.”

The Banks it included in its guidance for 2018 are:

  • Access Bank Plc-B2 stable
  • Sterling Bank Plc-B2 stable
  • Union Bank of Nigeria Plc-B2 stable
  • Bank of Industry-B2 stable (GRI)
  • Zenith Bank Plc-B2 stable
  • Guaranty Trust Bank Plc-B2 stable
  • First Bank of Nigeria-B2 Negative
  • United Bank for Africa-B2 stable

The report says that these 8 Banks hold Government securities that are 150% the size of their equity and are prone to the same kind of risks that Nigeria is susceptible to, placing customer deposits in danger and a systemic collapse in view. It says it doesn’t expect non performing loans to Banks to improve for the better due to the following factors:

  • Rising government arrears will affect the repayment capacity of contractors and sub contractors, magnifying asset quality pressures in the construction, infrastructure and public utility sectors
  • Weak commodity prices that will continue to inhibit the performance of loans to the oil and gas and commodity sectors; similarly, potential currency depreciation would hurt “unhedged” borrowers of dollar denominated loans (i.e borrowers without dollar revenues)
  • Ongoing structural issues that undermine credit quality. These include:
  1. Weak risk management and governance, and scant financial data and credit information that make it difficult for banks to assess borrower creditworthiness
  2. Weak legal frameworks, particularly regarding collateral, foreclosure and bankruptcy. We therefore consider loan-loss provisioning coverage in Africa (estimated at 60% on average) as low
  3. Local standards for problem loan classification may not capture all impaired loans
  4. High concentration of loans to single borrower and sectors which heightens bank’s vulnerability to a single default or to a sectoral shock

The report however warns that where dollar usage is high for example in Nigeria, dollar shortages will likely continue because:

  • Raising dollar funding will remain a challenge- especially for partly dollarised economies
  • However pressures are receding as economic growth accelerates and commodity prices stabilise
  • Main sources of foreign funding will remain multilateral development institutions and banks/syndication. International capital markets will only be open for the continent’s biggest banks
  • Foreign currency liquidity risks are exacerbated by the inability of central banks to act as ‘lenders of last resort’, since their access to dollars is limited.
Kelvin Emmanuel

About Kelvin Emmanuel

The Oil producing Angola in the Southern part of Africa faces what Nigeria faced 12months ago; a distortion in its exchange rate with a difference between the official markets and the parallel black markets. One dollar through the official window buys you 166 kwanza, while one dollar through the black market buys you 400 kwanza. Nigeria faced the same challenge 12months ago, when the distortion between the official and black markets was as much as the official markets trading at 306 with the parallel market ranging from 450 through to 510. The Central Bank Governor of Angola, Jose de Massano Junior announced in Luanda “We will stop having a fixed foreign exchange, we will adopt a floating regime of foreign exchange”. Angola faces exactly the same challenges and has been applying the exact same responses to an exchange rate crisis like using its foreign reserves that was sitting at $26bn to defend the currency kwanza, with no success so far, even though the external reserves has dropped to $14bn. Angola relies on Oil receipts for 80% of its government revenue, 90% of its inflow and 50% of its GDP. Angola is a $194bn economy that has been growing at an average of 10% on the back of rising oil prices since 2002 when its 27 year old civil war that started in 1975 ended. The state national oil company Sonangol reports that it produces up to 1.8m barrels of crude oil daily, however the government that until now has being led by the family dynasty Jose Eduardo dos Santos until recently when succession saw power transferred to Joao Lourenco, reports that the oil price rout in 2015/2016 that saw prices drop to as low as $28 per barrel caused ripples across the economic structures of the government, upsetting government revenues, its ability to fund its budget, capital project funding, foreign direct investments into the economy as a result of a currency crisis that was driven by the widening of gap between the official and street window of the kwanza, that until now has been pegged in a fixed exchange rate regime to the US Dollar.