Nigerian banks credit expansion outlook positive as yield on fixed income instruments fall

Financial analysts say there could be likely improvements in credit expansion by Nigerian banks in the near to medium as yield on fixed income instruments appear to be no longer attractive.

Equally, the general positive outlook of the economy is seen promoting production activities, especially in the oil and gas sector, which would see more demand for loans.

Analysts at FBNQuest Research in the Good Morning Note Thursday indicate that the current relative stable economy, uptick in selected private sector investments, and falling yields on fixed income instruments could spur banks to lend again after a somewhat lull due to hedges against surge in non-performing loans.

“Credit extension growth to the private sector by banks was almost non-existent last year because fixed income instruments were more attractive. However, given that yields have fallen by +/-300bps in the past six months, we see a gradual pick-up in lending to the private sector through this year,” they noted.

The said outlook for Nigeria’s economy is now relatively stable as some uptick in growth is expected on the back of an increased fiscal stimulus, and a pick-up in both oil prices and production as well as selective private sector investments.

“So far the deposit money banks (DMBs) have maintained a cautious approach towards lending to the private sector so as to avoid a surge in non-performing loans,” they said, adding that the National Bureau of Statistics (NBS) data on lending for the fourth quarter of 2017 indicate much as banking sector credit to the private sector fell by N100 billion from previous quarter.

“The NBS has recently released a report for Q4 2017, entitled Selected banking sector data, drawn from the CBN. This report shows that banking sector credit to the private sector totaled N15.7 trillion in Q4 2017, compared with N15.8 trillion recorded in the previous quarter,” they stressed.

In the NBS data, the oil and gas sector was the largest recipient of loans from DMBs, accounting for 23 percent of total credit to the private sector.

“We understand that some banks are seeing demand for loans for additional working capital requirements to boost oil production,” they pointed out.

The second largest recipient of loans was the manufacturing sector, which accounted for 14 percent of the total in the same period, unchanged from the previous quarter.

Meanwhile, the agriculture sector, which is at the forefront of the economic diversification initiative of the government, received just 3.4 percent.