How uncertainty in Nigeria’s oil industry vicariously affects bank loans to real sector

Brent crude prices near their lowest levels in a year have slashed earnings from Nigeria’s main source of foreign income, reducing the amount of foreign exchange banks need to fund deals. At least four of seven Nigerian lenders have either paid up their Eurobonds or are weighing early redemptions as banks struggle to grow loans in an economy battling to gain momentum.

The lenders are also facing uncertainties around what is shaping up to be a close presidential election in February, the ever-lurking risk of a currency devaluation and a surge in soured loans following the 1.6 percent contraction in the economy in 2016. Gross domestic product in Africa’s most populous nation rose by 1.8 percent in the three months through September from a year earlier, less than economists had predicted.

Fidelity Bank Plc, a mid-sized Nigerian lender, issued $400 million of five-year Eurobonds late last year at 10.75 percent, at the time the most expensive debt issued by an emerging market before the U.S. started tightening rates. Fidelity was the third Nigerian lender to tap the market in 2018 after United Bank for Africa Plc and Zenith Bank Plc issued $1 billion of bonds between them.

The pace of loan growth to the oil and gas industry was little changed in the third quarter at about 3.6 trillion naira ($9.9 billion) from a year ago, according to the statistics agency, even as output rose from a one-year low in the previous quarter. The naira is also trading near an all-time low, adding to the cost of repaying offshore debt.

Although Access Bank sees the currency between 361 and 364 naira per dollar, there might be a 10 percent devaluation in the long term, Managing Director Herbert Wigwe said on an investor call in October. The currency has weakened 1.2 percent this year and closed trading on Monday at 364.77 against the U.S. currency.

The Nigerian Stock Exchange Banking 10 Index declined 0.2 percent as of 1:44 p.m. in Lagos. The gauge has retreated 16 percent this year compared with 20 percent decline by the 164-member NSE All Share Index.

Bloomberg reports that banks that provided loans near, or at the peak, in oil prices “may have to rethink that strategy,” said Akinbamidele Akintola, a Lagos-based equity analyst with Stanbic IBTC Stockbrokers.

There has been only a slight improvement in troubled credit. Non-performing loans stood at 12.5 percent at the end of June, down from 14.8 percent at the end of 2017, according to the central bank.

“If, for example, a bank raises money at 8 percent, it has to deploy it at 12 percent so it can make a margin,” Akintola said. “If the bank cannot find any opportunities for the funds it has raised, then there is no point of it sitting on money it doesn’t need.”