According to the selected banking data released by the National Bureau of Statistics (NBS), the pace of credit creation garnered momentum in Q3 2020 as total credit to the economy grew by 5.6% q/q to N19.9tn in Q3 2020 from N18.8tn at the end of Q2 2020.
We recall that the pace of growth in credit creation slowed in Q2 2020 to 1.8% largely reflective of Covid-19pressures on banking operations as well as banks’ unwillingness to extend credit.
However, with the gradual re-opening of the economy, banks appeared to be increasingly willing to create more credit in Q3 2020. We also note that the increase in loan creation may have been supported by a magnifying naira devaluation effect on USD denominated loans.
Furthermore, the amount of Non-Performing Loans (NPLs) declined 3.5% q/q to N1.2tn in Q3 2020 while NPL ratio declined 55bps to 5.9% in Q3 2020 despite the expanding loan book. We think the decline in NPLs is reflective of the headroom Deposit Money Banks (DMBs) have gotten from the CBN to restructure some non-performing loans by extending tenor in the face of pressures from Covid-19 on businesses.
In terms of loan exposure, DMBs remain hugely exposed to the Oil & Gas sector with loans to that sector printing at 25.8% of total credit as at Q3 2020 followed by Manufacturing at 15.3%.
We think the rate of growth in loan creation is considerably impressive particularly as part of an attempt to support growth in strategic sectors.
However, we remain concerned about macroeconomic fragilities as well as vulnerabilities of businesses to a hostile operating environment. Thus, we think the significant surge in credit creation over the past five quarters could lead to a subsequent build-up of NPLs.