Why Citigroup Predicts A Credit Crisis For Nigerian Banks

• Nigerian banks are on the verge of another credit crisis, Citigroup’s Head of Frontier Market Banks and Research, Josh Levin has warned, citing what he described as deteriorating macro conditions in the country.
• The economic analyst, in a presentation at the just concluded Citi media summit in London, noted that borrowers, mostly oil and gas industry operators are unable to service the loans obtained from the Nigerian banks due to the plummeting price of oil.

“Nigerian banks have made a lot of loans to the oil and gas industry. About 25 to 30 per cent of the bank loans went to the oil and gas sector. So as the price of the oil plunges, there will be a lot of concerns about the ability of the borrowers to service the loans, because the cash flow of the borrowers goes down.

He said: “The big issue at the moment for banks in Nigeria is Nigerian banks are on the verge of another credit crises. Alternatively, you could say, how well are Nigerian banks positioned to whether the deteriorating macro conditions in the country. The macro environment has really deteriorated over the past 15 months; so, what’s going on, the price of oil has plummeted. Even though Nigeria directly derives only a 15 per cent of its GDP from the oil industry, Nigeria derives roughly 80 per cent of its tax revenue from oil. So the low oil price, certainly negatively impacts the country’s economy.”

• According to Levin, most investors are concerned about the growth of Nigeria, a country of over 170 million people and the largest economy in Africa because of the strength of the country’s potential. He said for investors who are focused on the frontier markets, Nigeria tends to be the largest or one of the largest in the bench mark, adding that getting Nigeria right is very important to these investors.
  The Citi analysts added:

  “The big issue right now is credit. Investors are worried that many of the loans by the Nigerian banks are going to go bad and these bad loans will severely impair the banks. So why would investors think the loans are going to go bad? I think the point is the GPD growth, when the GPD growth tends to slow, credits tend to deteriorate. These are what investors are worried about. These are the concerns on the credit side for the Nigerian banks.”

• The economic expert, who put the average assets of big Nigerian banks at roughly $12 billion to $15 billion in size, said they are very small when compared to banks in the frontier markets.

“When you think about the bank and size, you should think about the bank’s assets; how many assets the bank has. For instance, if you look at the big Nigerian banks’ assets, the average assets is roughly $12 billion to $15 billion in size; the Egyptian bank is $20 billion, Citi is $220 billion in assets and the US Regional Bank in Latin America is $75 to $100 billion in assets; so the best we are talking about, even though it may not be the biggest in the country, is very small when it has to do with banks in the markets.”

• He said the deteriorating macroeconomic environment is negatively affecting the Nigeria banks although there is no crisis indication yet in the banks’ second quarter results declared in July. According to him, from the results, the credit metric reported by the banks are not accurate and insisting that the banks are playing games with the numbers.