Home Finance Weak rule of law, corruption restrains banking growth and stability— S & P

Weak rule of law, corruption restrains banking growth and stability— S & P

by Business News Report

Standard and Poor an international rating agencies has in its recent report  that rapid loan growth and a lapse in corporate governance present the main risks to the Nigerian banking sector. According to the report “The structurally high level of credit risk is the result of historically weak underwriting standards and a lack of transparency, while potential political interference could undermine the progress made in regulation and supervision and impact our ratings on the banks.

“What is more, a decline in oil prices and production, and in the exchange rate, could rapidly affect the banking sector, which is significantly exposed to the oil and gas sector and foreign currency lending. In addition, competition for new business could lead banks to raise their risk tolerance as various regulatory changes and lower interest rates will likely constrain earnings in 2014.

“This presents a risk to banks’ capital if credit growth resumes at a quicker pace than we currently anticipate, or if shareholders become more demanding in terms of dividend distribution. We see no immediate rating triggers. That said, infrastructure spending and the reforms in agriculture and the power sector could in our view translate into improved loan growth opportunities in the real economy, and at the same time support industry diversification and reduce single-name concentrations.

“We also believe sector reforms and rising wealth levels could create more banking opportunities in retail and in small and midsize enterprises.

The report said that despite reasonably sound growth, of the Nigerian economy, weak laws and corruption are serious hindrances to rapid progress. It said “In our opinion, Nigeria faces significant governance issues, and political tensions within the ruling party are intensifying in anticipation of the 2015 presidential election. But it’s the country’s historic weak rule of law, and high level of corruption, that will likely continue to restrain the banking sector’s long-term growth and stability. We forecast average GDP growth of 6.4 per cent for Nigeria in 2013-2016, supported by non-oil sectors. That said, the oil sector will continue to dominate Nigeria’s economy because it provides about 15 per cent of GDP

Standard and Poor in its report said “Nigerian banks rated by Standard & Poor’s Ratings Services are assigned stable outlooks, reflecting our view that the domestic economy will continue to support the banks’ loan growth, earnings generation, and balance-sheet growth given the current low level of nonperforming loans.

“However, we see greater downside risks than upside for Nigerian bank ratings in 2014 due to mounting political pressures, which could affect the banks’ growth and loan portfolio quality, with an attendant gradual deterioration in capital and operating performance. We also consider that future growth and stability of the banking sector will largely depend on a cohesive regulatory framework, together with political and institutional stability, and see a risk that the momentum regulatory improvements may slow after the leadership changes at the central bank this year. We base our opinions on Nigeria’s robust GDP growth, which we estimate at 6.5% in 2014; on stable inflation of about 8%-9%; and on an ongoing, but slower push toward economic diversification in the country, supported by reforms in the power sector and in agriculture.

“These factors should in our view support accelerated balance sheet growth among the banks in 2014 of between 20 per cent and 30 per cent. Meanwhile, we anticipate that the Nigerian banking sector will remain entrenched in its current tiering configuration for the foreseeable future. However, we believe competition for new business will intensify to attract private deposits and provide lending across the value chain offered mainly through high quality corporates.

Standard and Poor further said “Our stable outlooks on Nigerian banks reflect the country’s reasonably sound economic growth, and we believe that economic reform will support credit growth and earnings stability in 2014. Our base-case scenario includes GDP growth of 6.5% in 2014, stable inflation, and slower economic

Diversification; Balancing loan growth of 20%-30%, slower profit growth, and increased shareholder demands, we anticipate a gradual deterioration in capital for all Nigerian banks through 2014-2015; Unexpected rapid loan growth and corporate governance issues continue to be major threats to ratings in the short term. It is our expectation that the sector will remain highly competitive and could cause credit risk to rise”.

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