Nigerian banks are likely to face another year of elevated credit losses as stubborn inflation, high borrowing costs and the withdrawal of regulatory support continue to strain borrowers’ repayment capacity, according to a new assessment by S&P Global Ratings.
The warning suggests that while the banking sector remains profitable and adequately capitalised, lenders may increasingly shift their focus from loan growth to risk management as economic pressures weigh on households and businesses.
In its Global Banking Outlook 2026 Midyear Update: Emerging Europe, Middle East and Africa (EMEA), S&P said Nigeria’s banking sector is expected to experience sustained pressure on asset quality through 2026, reflecting broader challenges confronting major banking markets across Africa.
The ratings agency forecasts that Nigeria’s non-performing loan (NPL) ratio will stabilise at between six and seven per cent next year, while credit losses remain elevated at between two and 2.5 per cent.
The projections come at a critical period for the industry as banks adjust to tighter prudential standards following the gradual withdrawal of regulatory forbearance measures that had previously cushioned parts of the sector from the full impact of economic shocks.
S&P noted that rising inflation and elevated interest rates are eroding household purchasing power and squeezing corporate profitability, increasing the likelihood of loan repayment difficulties.
“We expect many banking sectors in emerging EMEA, despite general resilience, will face increasing credit losses, as rising inflation weighs on household disposable income and corporate profitability,” the report stated.
The agency identified Nigeria among several markets where macroeconomic conditions are likely to continue testing borrowers, even as banks remain broadly resilient.
The outlook also reflects growing concerns about the cumulative impact of monetary tightening on loan performance. Since interest rates began rising sharply, debt servicing costs have increased significantly for businesses and consumers, while inflation has continued to pressure operating costs and real incomes.
According to S&P, the combination of high rates and the removal of regulatory forbearance will remain a key drag on banking sector asset quality over the medium term.
“Additionally, the removal of regulatory forbearance and high interest rates will continue to weigh on banks’ asset quality,” the report said.
Despite the anticipated deterioration in credit quality, the ratings agency does not foresee a systemic threat to the sector.
Instead, it expects strong profitability to provide a sufficient buffer against rising impairment charges.
“We expect most banks will be able to absorb the incremental provisioning requirements thanks to their strong profitability,” S&P said.
The agency projects average return on equity across the sector to moderate to between 20 and 23 per cent in 2026, compared with an estimated 25 per cent in 2025, reflecting higher provisioning expenses and a more challenging operating environment.
The assessment suggests that Nigerian lenders may increasingly prioritise loan recovery, portfolio restructuring and risk pricing as they seek to preserve earnings amid rising credit costs.
Beyond domestic factors, S&P also highlighted global risks facing banking systems across emerging markets, including geopolitical tensions in the Middle East, tighter international financial conditions and uncertainty surrounding the future path of United States interest rates.
However, the agency believes Nigeria is relatively insulated from the direct economic consequences of the Middle East conflict because of its position as a net crude oil exporter and emerging producer of refined petroleum products.
“As a net oil exporter and an emerging producer of refined fuels, Nigeria is less exposed to the spillover effects from the Middle East war,” the report noted.
Even so, analysts say the domestic banking sector remains heavily exposed to local economic conditions, particularly inflation, unemployment and weak consumer purchasing power.
The latest outlook indicates that the key challenge for Nigerian banks over the next 18 months may not be profitability but maintaining asset quality in an environment where businesses and households continue to grapple with elevated borrowing costs and persistent economic pressures.
