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According to data from the Nigerian Bureau of Statistics (NBS), NPL ratio for the Nigerian banking sector was down 2.6ppts q/q to 6.7% in Q3 2019 from 9.3% in Q2 2019. On a y/y basis (Q3 2019 compared with Q3 2018), the sector NPL ratio was down 7.5ppts.

Nevertheless, it remains above the CBN’s regulatory limit of 5.0%. Gross NPLs declined 23.1% q/q and 50.6% y/y to N1.1 trillion in Q3 2019. In addition, banking sector gross loans were up 7.3% q/q and 4.8% y/y to N16.6 trillion which is the highest growth in 10 quarters dating back to Q2 2017.

We recall that earlier in the year, the CBN announced a minimum loan to deposit ratio (LDR) of 60.0% with a September deadline for compliance. This was later increased to 65.0% (with a December deadline) following observed compliance from banks.

We believe some banks in an attempt to meet up with the September deadline for the 60.0% minimum LDR ramped up lending which must have driven the rise in gross loans within the quarter. On the NPLs, we note that the decline is likely due to sutained recoveries and write-offs.

Going forward, we anticipate sustained rise in gross loans in Q4 2019 as banks strive to meet the CBN’s new minimum LDR of 65.0%. We also do not envisage any surprises from banks in Q4 as regards NPLs.

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However, we note that the Nigerian macro and business environment remains very fragile and several bottlenecks continue to hinder business growth, thus we think NPLs may become a source of worry in the medium to long term if credit creation continues to increase in an economy experiencing vapid and uninspiring growth.



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