Government securities now account for about 11% of Nigerian banks’ total assets, reflecting years of constrained credit extension and a preference for lower-risk sovereign instruments, according to a new banking sector outlook by S&P Global.
The ratings firm said the rising exposure has increased banks’ sensitivity to sovereign-related shocks, although this risk is expected to ease gradually as lending to the real economy improves and macroeconomic conditions stabilise.
In its Nigerian Banking Outlook for 2026, S&P Global noted that despite regulatory headwinds, tighter capital requirements and easing interest rates, Nigerian banks are expected to remain resilient and preserve positive profitability over the medium term.
What the ratings firm says
- In its outlook, the ratings firm said, “Banks’ share of government securities has been increasing in recent years due to limited credit extension and now accounts for about 11% of the bank’s total assets. The growing exposure increases its vulnerability to sovereign-related shocks.
- “We expect the nexus between banks and sovereign risks to slightly moderate as lending gradually increases, targeting real sectors of the economy and as fiscal deficits narrow and economic conditions improve.”
S&P Global also projects Nigeria’s real GDP growth to average 3.7% over 2025–2026, supported by both oil and non-oil sector activity.
Inflation is expected to moderate gradually to around 21% in 2026, paving the way for further monetary easing after the 50 basis points interest rate cut implemented in September 2025.
Against this backdrop, nominal credit growth is forecast at about 25%, driven largely by increased lending to the oil and gas, agriculture, and manufacturing sectors.
The report noted that lending to the oil and gas sector is expected to support higher production following measures to curb militancy and crude oil theft.
Retail lending, however, is projected to make only a marginal contribution to overall loan growth due to its relatively small share of banks’ portfolios.
Despite the headline growth, S&P said real credit expansion would remain modest, reflecting high inflation and lingering structural constraints.
The report also highlighted the concentration risks within banks’ loan books, with about 50% of loans denominated in foreign currency and roughly one-third of total exposures linked to the oil and gas sector.
In addition, around half of gross loans are concentrated among the top 20 borrowers, increasing vulnerability to sector-specific and single-name shocks.
Nonperforming loans to stabilise at 7%
Asset quality deteriorated in 2025 following the removal of regulatory forbearance on oil and gas sector exposures.
Nonperforming loans rose to about 7% in 2025 from 4.9% in 2024, as banks began recognising previously restructured or deferred problem loans.
While some institutions have written off affected exposures, others are still in the process of restructuring them.
S&P expects NPL ratios to stabilise at 6%–7% in 2026, assuming oil prices average around $60 per barrel, a level considered sufficient to support borrower solvency.
Stage 2 loans are also expected to remain elevated at about 20%–22%, reflecting ongoing credit risk in restructured facilities.
S&P Global forecasts that Nigerian banks’ profitability will decline slightly in 2026 but remain strong by regional standards.
Average return on equity is projected to normalise to between 20% and 23% in 2026, down from an estimated 25% in 2025, while return on assets is expected to ease to about 3.0%–3.1%.
Profitability is expected to be supported by still-elevated interest margins, growth in non-interest income, and slightly lower loan loss provisions.
Although interest rates are projected to decline, S&P said they would remain high relative to peer markets, continuing to support net interest margins.
Non-interest income is expected to benefit from higher fees and commissions, driven by expanding digital payments, retail banking services, and agency banking networks.
