Nigerian banking sector hovers near top of risk watch, says EIU

The Economist Intelligence Unit (EIU), a member of The Economist Group, has indicated that Nigeria’s banking sector is hovering near the top of its risk watch list on high levels of non-performing loans, excess credit growth and low capital ratios

Simon Baptist, global chief economist at The Economist Intelligence Unit, in a note Thursday, said over the past three years the EIU’s global average risk score for the banking sector has been coming down albeit with pockets of danger.

Specifically, Nigerian banking sector is identified as nearing the top risk watch because of high levels of non-performing loans and low capital ratios.

“Some countries with high risk are in the midst of severe civil conflicts, such as Ukraine and Venezuela, but a number of countries – including Iran, Nigeria, and Azerbaijan – are hovering near the top of our risk watch list for more traditional reasons such as high levels of non-performing loans, excess credit growth, and low capital ratios,” he said.

The EIU defines a banking crisis as where banks holding 10 percent or more of total bank assets become insolvent and unable to discharge their obligations.

The Nigerian banking industry has been plagued lately by high non-performing loans and excessive insider related credit growth as well as foreign exchange illiquidity as a result of the low price of the country’s oil exports.

The Central Bank of Nigeria (CBN) has adduced much to the high non-performing loans and the restrictive credit, which has forced it to raise interest rates to encourage banks to lend to the private sector.

However, the banks are still steeped in insider related credit and exposure to the public sector, thereby further crowding out the productive private sector from the loans market.

Analysts say that though the banks are still making quite reasonable returns in terms of earnings, they are not back in full sun yet since they derive much of their earnings from excessive charges and wider margins as against real intermediation.

They added that the currency devaluation or floatation embarked upon by the CBN in 2016 nearly led to a number of bank failures, exacerbated by declining consumer incomes and recession, which was promptly reversed by the CBN through regular intervention and the establishment of the investors and exporters window at the foreign exchange market.

However, there are skepticisms about the ability of the government to support the current foreign exchange policy. This is partly because of the cap on Nigeria’s crude oil output at 1.8mbpd, as well as speculations of Nigeria being included in the output cuts at the September 22nd meeting in Vienna.

“The wide margin between borrowing and lending rates as well as excessive charges from cheque books to different alerts charges are responsible for the handsome returns they are declaring amidst dwindling incomes and recessive environment,” an analyst bemoaned, adding that the Nigerian average bank customer is overstretched with too many bank taxes.

The thorny issue of high non-performing loans, according to money analyst, should bring to fore bank stress test. It has been long, over eight years when the last bank stress was done.

“In Europe and the Americas, bank stress is done regularly to ascertain the health of banks. That we have not done in a while except for the CBN reassuring that the banking sector is safe,” he said, adding that it was the time the CBN embarked on one to save the banking public from anxiety.

The EIU position on our banks calls for real introspection as the sector may not attract foreign investment with such a risk watch,” another told businessamlive.

Indeed, the EIU advised those seeking a calmer banking landscape should head to Sweden or Canada, “whose banking systems we rate as the least likely to face a crisis.”