Impaired loans of Nigerian banks could soar in 2021 – Fitch Ratings

Banks in Nigeria run the risk of larger impaired loan portfolio in the year ahead, stoking the fear of steep deterioration in the asset quality of lenders as the coronavirus pandemic erodes the capacity to repay consumer and commercial credit, and momentary debt-relief measures fade out across Africa, global credit rating agency Fitch said Tuesday.

Its forecast of gradual rebound for African lenders in 2021 noted the huge possibility of restructuring big corporate loans on a large scale to avert a dramatic rise in impaired loans.

“Impaired loan ratios could head towards low double digits in some countries, particularly in Nigeria and Morocco,” said New York-based rater in a commentary titled Fitch Ratings Sees Gradual Recovery for African Banks in 2021.

“Our base case is that due to still healthy revenue generation capability, most banks in the region will remain profitable despite large credit losses.”

Besides its anatomy of the impaired loan situation of Nigerian banks in 2021, Fitch foresaw lenders would face the uncertainty of foreign currency liquidity, which might weigh on their ratings ultimately.

Read also: Nigerian banks may be worst hit by oil price plunge, coronavirus – Fitch Ratings

“Foreign-currency liquidity risks have not materialised, particularly in Nigeria but present a significant risk to banks’ ratings,” Fitch said.

Nigeria’s foreign exchange reserves have been on a steady fall since May, when it reached $36.6 billion and stood 3% lower at $35.4 billion as of Friday.

The low liquidity of foreign exchange in banks as well as at the official exchange window, where the Central Bank of Nigeria operated a dominantly inflexible rate, has induced higher dollar demand in the black market where the rate is arbitrarily fixed, heaping pressure on the naira.

“The risk to capital comes from asset quality but our stress tests show that banks have healthy capital buffers and could withstand moderate shocks,” Fitch said, hinting at the potential of mitigating the effects of risks like impaired loans through robust capital.