Nigeria Banks’ growth prospects will be subdued in 2021, as signs of domestic economic recovery are still elusive, while economic growth has been below the strong averages achieved prior to the 2015- 2016 oil price shock.
Economic setbacks will persist despite more sustained oil prices, which we now project at $60 a barrel in 2021 and 2022, and because the vaccine rollout is in early stages. We expect GDP growth to average about 2% a year through to 2023 aft er a contraction in 2020. Weak economic fundamentals will constrain private – sector credit growth, estimated at 5% through 2022. This is despite the 65% minimum loan to deposit ratio introduced in 2019.
The banking sector is exposed to short credit cycles and high credit risks because of Nigeria’s reliance on oil and its sensitivity to currency depreciation and high inflation.
The pandemic’s effects have been partially mitigated by the 2016 restructuring, which saw banks use lower break – even prices and a prefunded debt service reserve account that provides three to six months of payment buffers during times of stress. Nonetheless, restructured loans have jumped to 20% – 25% in 2020 from about 10% in 2019, as a result of the pandemic.
However, NPLs have only increased marginally in 2020, leading to a ratio of 6.1% because of regulatory forbearance measures, against a mi nimum regulatory limit of 5%. We expect NPLs to rise to double – digit levels in 2021 as regulatory measures end. We forecast credit losses to range 2.0%- 2.5% in 2021 – 2022, compared with an estimated 1.5% in 2020.
The Nigerian banking sector has been operati ng under difficult economic and regulatory circumstances since the 2016 crisis. The restrictive FX ability to manage their FX liquidity and forced them to reduce their FX exposures.
Meanwhile, the CBN limited the extent of its foreign exchange sales into the Nigerian Autonomous Foreign Exchange Fixing Mechanism , or NAFEXwindow, which in turn suffered from a scarcity of sellers, creating at times a backlog in FXsupply.
Most banks have gradually overcome their short – term liquidity difficulties following the introduction of the NAFEX window in April 2017, while external debt will likely remain manageable at approximately 13% of total loans in 2021, according to our forecasts.
The FX liquidity has had a knock – on effect, given that the CBN has been managing naira liquidity tightly. In 2019, it imposed a minimum Cash Reserve Requirement (CRR) of 27.5% in order to curb FX demand and penalizes banks reporting a loan – to- deposit ratio below the minimum by withholding central bank reserve s equivalent to 50% of the lending shortfall.
The recent move to a single FX rate is unlikely to accelerate the normalization of the minimum CRR. In addition, earnings growth is likely to slow down because of higher credit impairments in 2021, and the AMCON levy (to fund bank clean – ups).
The CBN created AMCON in 2010 to help clean up asset quality in the banking system over the 10 years following the 2009 financial crisis, but it is likely to remain for a longer period. The levy accounts for about one – third of banks’ cost bases, and we now see it as a form of market distortion that will likely persist.
Most Nigerian banks are largely funded by low – cost customer deposits, but lower – tier banks rely on equity to fall to about 16% in 2021 from almost 19% in 2020, while return on assets will slide below 2%. Although suffer, we don’t expect rated Nigerian banks to breach minimum regulatory capital ratios as a result of the recent naira devaluation.
