Q4 2020 Banking Data Report: Gross Loans Trend Higher Amidst Improving Asset Quality

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Earlier, the National Bureau of Statistics released the Selected Banking Data Report for Q4-2020. In the report, the banking sector Gross loans reportedly grew 16.6% y/y as well as 5.3% q/q to N20.5tn.

Similarly, absolute Non-Performing Loans (NPLs) rose 16.0% y/y and 5.5% q/q to N1.2tn at the end of Q4-2020. Furthermore, while NPL ratio grew 1bp q/q, it declined 4bps y/y to print at 6.0% at the end of Q4-2020.

The growth in gross loans from the banking sector comes despite significant macroeconomic risks in 2020 due to the Covid-19 pandemic. That said, we note that gross loan growth has been driven by a confluence of factors.

First, the CBN’s regulatory directive which saw the Loan to Deposit ratio (LDR) rise to 65.0% supported lending appetite among commercial banks. Also, the Naira devaluations over the past year have increased the Naira value of foreign currency loans.

On the decline in NPL ratio, we believe this was driven by CBN’s regulatory forbearance which allowed banks to restructure their loan books, particularly in sectors vulnerable to the shocks ignited by the Covid-19 pandemic.

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Looking ahead, we observe that growth risks have continued to dissipate amidst renewed optimism on full economic reopening in Nigeria. However, the operating environment for businesses remains fraught with legacy structural concerns.

Thus, we think lenders operating at the CBN’s 65.0% Loan to Funding ratio will be reluctant to provide more credit, while those still falling short will remain active credit creators, considering the effect of CRR debits on banking system liquidity.

On NPLs, given the banking sector’s exposure to the oil & gas industry, we do not expect a major shock in NPL ratio, considering the recovery in crude oil prices. Also, the near-fully reopened Nigerian economy posits a better macroeconomic and business story for loan performance in non-oil sectors.

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