Fitch Ratings says in its 2015 outlook report that the oil price shock and the resulting policy moves leads to a negative sector outlook for the Nigerian banks.
Fitch’s negative view of the sector reflects the challenging and volatile operating environment due to low oil prices (Fitch forecasts Brent crude to average USD83/barrel in 2015) and its impact on business and the economy. Furthermore, combined with recent policy actions by the Central Bank of Nigeria (CBN) to devalue the naira, raise interest rates and increase reserve requirements (CRR) “we are forecasting bank profitability, asset quality and capital ratios to deteriorate in 2015,” the agency said in a statement obtained from its website.
It further assured that the weaker operating environment may not necessarily have rating implications.
According to Fitch, Six Nigerian banks, First Bank of Nigeria, United Bank for Africa, Diamond Bank, Union Bank, Fidelity Bank and First City Monument Bank, have ratings driven by the probability of state support.
“The ability of the authorities to support domestic banks is limited by Nigeria’s sovereign rating (‘BB-’/Stable).
“The willingness to support remains strong and has been clearly demonstrated in the past,” said Fitch.
The Stable Outlook on these banks’ Issuer Default Ratings (IDRs) reflects the Stable Outlook on the Nigerian sovereign. It says these banks’ IDRs would only be impacted by a multi-notch downgrade of the sovereign rating, which is unlikely in the near term. Three Nigerian banks according to Fitch, Zenith Bank, Guaranty Trust Bank and Access Bank have IDRs driven by their intrinsic creditworthiness as defined by the Viability Ratings (VR). As for other Nigerian banks rated by Fitch, their low VRs (generally in the ‘b’ range) already factor in the tough operating environment in Nigeria.
“As such, the macro implications of the current low oil prices and policy moves are unlikely to materially impact VRs and indirectly their IDRs in the near term. Nevertheless, all banks VRs remain sensitive to fast erosion in capital ratios and asset quality.
Given the current Support Rating Floors, most banks’ IDRs would not be impacted by a downgrade of their VRs. Banks are generally well positioned for the rate rise as they can re-price loans and benefit from higher yields on treasury bills to offset the increase in the cost of funding,” the agency noted.
However, the positive impact on the net interest margin (NIM) and core earnings will be limited due to the simultaneous hike in the reserve requirement. Profitability will also be affected by slower business growth and higher loan impairment charges. Other profitability constraints remain, such as the revised rules on banking charges and higher regulatory levies enforced in 2013.
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