Nigerian banks posted good financial results for 2016, despite turbulent operating conditions, but Fitch Ratings believes that significant financial risks persist beyond reported figures.
The banks' healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June. The banks also made higher US dollar core income (in naira terms) and booked sizeable foreign-currency (FC) trading income, which offset rising impairment charges.
While the banks' performance ratios improved in the year, we note that a substantial part of earnings were non-recurring and will be difficult to repeat. Sector impaired loan ratios increased sharply but this was expected given the extent of Nigeria's macro-economic challenges. Asset-quality metrics would have been even worse if not for high levels of restructured loans, particularly to the troubled oil sector. Low reserve coverage and high levels of FC lending add to our concerns about the banks' long-term financial health. Capital buffers continue to be weak despite relatively high reported capital adequacy ratios (CARs).
We maintain that ratios are vulnerable to even modest shocks for some banks. Year-end CARs declined due to the twin pressures of inflated risk-weighted assets (due to the revaluation of US dollar assets) and rising impairment charges, although this was partially offset by strong retained earnings, which benefitted from the revaluation gains. Funding and liquidity risks continue to be high. Loans/deposits ratios have been rising but are not excessive. The primary concern relates to FC liquidity, which remains tight despite the authorities' attempts to normalise the foreign-exchange interbank market.
For 2017, we believe there will be a slight easing on the banks' operating environment reflecting some early-stage improvements on the macro-economic front. We expect banks to remain profitable despite still modest credit growth and forecast further asset-quality deterioration, but at a slower pace. The big question is whether there will be improvement in FC liquidity, but this to a large extent depends on factors beyond the banks' control.