The crash in the prices of crude oil across the globe and the coronavirus pandemic appear to have negative effects on the Nigerian banking industry. Crude oil is the biggest source of inflow in the country, as it represents over 90% of the country’s foreign exchange earnings, with over 60% of government revenue.
Although the oil sector makes 9% contribution to the GDP, it is an important facilitator of economic activity and a leading indicator for the non-oil sector. In Nigeria, the oil sector is a major source of liquidity, so a sharp decrease in oil revenue leads to negative growth in GDP.
The coronavirus pandemic has also led to major lockdown and restrictions around the world as governments look for measures to contain the disease.
The banking industry is not immune to the negative impact of low crude oil prices and the coronavirus disease. The crude oil price slump and the global disruptions as a result of the coronavirus pandemic will negatively affect the credit profile of Nigerian banks.
According to Fitch Ratings report, the asset quality deterioration, which is linked to high exposures to the oil and gas sector, is the biggest threat to ratings, and the operating environment risks inevitably increase in Nigeria when oil prices fall.
Experts have always suggested that a declining oil revenue might lead to further currency devaluation and thereby increasing the risk of a recession. Operating environment risks are compounded by economic and financial market disruption amid measures to counter the pandemic, putting pressure on all borrowers.
The low oil prices can affect the repayment of credit facilities granted to players in the oil and gas sector. It can even affect some players, especially the SMEs and some others in the non-oil sector.
In a bid to cushion the negative impact of the low oil prices and the coronavirus pandemic, the Central Bank of Nigeria (CBN) announced some measures that would help provide relief to businesses and households, as well as help the flow of credit into the economy.
The asset quality of Nigerian banks can deteriorate significantly depending on the duration and severity of the oil price shock and coronavirus turmoil.
Fitch recently downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’ and placed all 10 Nigerian banks’ Viability Ratings and IDRs on Rating Watch Negative. This reflects the expectation that banks will be under pressure due to the weaker operating environment in the coming months.
Loans and advances in the oil and gas sector constituted about 30% of the total risk assets in the industry as at the end of September 2019. A look at trends in 2008-2009 and 2015-2016, when the country was faced with similar circumstance of low oil prices, showed an increase in Non-Performing Loans (NPL).
These NPLs seem to decrease at the time of rising oil prices due to mostly recoveries.
In addition, the increase in risk assets is aided by the increase of Loan to Deposit Ratio (LDR) to 65% by the CBN. In order to meet up with the deadline, the Nigerian lenders had to lend money to some high risk sectors, thereby exposing them further to weak risk asset quality.
Devaluation also affects SMEs, particularly in the manufacturing and services sectors given Nigeria’s dependence on imports for raw materials and finished goods. However, the direct impact of devaluation on banks’ regulatory capital is mitigated by their net long foreign-currency positions.
The Fitch report expects an increase in restructured loan to 25%-30% of the total loan portfolio by 2020-2021 as the banks extend tenors and cut interest rates to help the borrowers.