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Fitch raises fresh crisis alert on Nigeria banks

by Business News Report

By Omoh Gabriel

Fitch Ratings has raised fresh alert on the growing loan facilities in the Nigerian Banking sector that might lead to another round of non performing loan crisis. Fitch in a newly-published special report on Nigeria banks said that the recent rapid credit growth in the Nigerian banking sector may give rise to weakened asset quality and higher non performing loans if left unchecked.

The report which was released yesterday said the intervention of “Asset Management Corporation of Nigeria (AMCON) during 2010 and 2011 led to a significant reduction in non-performing loans in the Nigerian banking sector. Fitch Ratings said it believes there has been a marked improvement in banks’ asset quality, with AMCON playing an important role in maintaining stability. Fitch report said that “Rapid underlying credit growth of 30-66 per cent was evident in most of the Fitch-rated banks in 2011 which the agency considers will be a negative credit driver if left unchecked.

“The increase in credit extension follows two years of pedestrian loan growth during Nigeria’s banking crisis.

Fitch believes that the extent of the crisis was itself exacerbated by the previous credit boom and expects Non Performing Loans to begin to tick up as the new lending seasons”. The report further said that “Fitch believes that internal capital generation needs to be addressed in the sector as the generous dividend policies demanded by investors are not conducive to sustainable loan book growth in the medium-term. The new report considers that many Nigerian banks have thin levels of Fitch Core Capital, which are lower than is appropriate for Nigeria’s difficult operating environment. Sustainable Fitch Core Capital ratios will be a key rating driver for any future positive action on the banks’ Viability Ratings”.

It further said that “Cost to income ratios are relatively weak across the sector, with most banks reporting ratios of 60-75 per cent during 2011. GTB is a positive outlier with an efficiency ratio of 46.7 per cent in 2011 following a track record of well contained costs. The agency considers that improved efficiency will be a key differentiator for the more successful banks and will support earnings growth and ultimately contribute to better internal capital generation.

According to Fitch report “The Nigerian banks are primarily funded by customer deposits which make up at least 80 per cent of most banks’ funding profiles. Deposits are short-term, with 80-95 per cent of deposits maturing within three months. However, most Fitch-rated banks appear to have relatively stable franchises and liquidity is typically managed on a behavioural basis.

The report further said that “Deposits have increased in most banks and asset growth is a characteristic of the market. Fitch has observed a mild flight-to-safety during the banking sector crisis of 2009-2010 and expects that the banks with stronger franchises will be in a position to capitalise on their lower-cost funding bases to achieve more dominant market positions. Over time, Fitch expects the market share of 5-6 dominant players to increase even further relative to peers.

Denzil De Bie, a director in Fitch’s Financial Institutions team said “There was a marked improvement in banks’ asset quality during 2011 following the sale of problem loans to the Asset Management Corporation of Nigeria,”. “However, rapid underlying credit growth of 30%-66% was evident in most of the Fitch-rated banks in 2011 which the agency considers will be a negative credit driver if it continues”. The special report highlights some of the key rating drivers for Nigerian banks in the context of their mostly ‘b’ range Viability Ratings.

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