According to the recently released data on the banking sector for Q4 2019 by the National Bureau of Statistics (NBS), banking sector credit to the economy grew for the second consecutive quarter by 5.8% q/q in Q4 2019 to N17.2 trillion, the highest level as far as 2007. Accordingly, credit growth rose significantly by 14% y/y in 2019 compared to the decline of 4% in 2018.
This growth is consistent with the strong d0uble-digit in the loan book of tier one banks under our coverage; Guaranty (19%), Zenith (26%), UBA (20%), Access (46%) and FBN (11%). The data also revealed that the size of Non-Performing loans fell by 4.4% q/q to N1.05trn while NPL ratio declined to 6.03% in Q4 2019 from 6.67% in Q3 2019 (inclusive of the effect of a larger loan base).
We believe the growth in credit to the economy was largely driven by the heterodox policies adopted by the CBN in stimulating credit growth to the private sector. We recall the CBN announced a flurry of regulations in Q3 2019 and Q4 2019 including the minimum LDR level of 60% (which was later increased to 65% to be attained by Q4 2019) as well as banning corporates and PFAs from participating in its Open Market Operation (OMO).
These policies resulted in downward pressure on lending rates due to buoyant system liquidity as well as pressure on banks to create new loans. We highlight that Guaranty trust bank revised downwards the lending rates on consumer loans (QuickCredit) to 1.33%/ month from 1.75%.
Looking ahead, we expect credit creation in the economy to wane significantly on the back of deterioration in macroeconomic conditions induced by COVID-19 and the sharp decline in oil prices. In the short term, we believe banks will be reluctant to create new loans in view of the disruption to economic activities following the lockdown in some key states across the country as well as the increased risks to asset quality issues.
On the demand side, we expect the pass-through impact of subdued economic activities to constrain the demand for credit from individuals and corporates. In the medium to long term, credit creation in the economy depends on the pace of flattening in the curve of COVID 19 cases as well as rebound in oil prices.