Nigeria's weak operating environment is still a challenging factor for the banking sector
by Aderemi Ojekunle- Nigeria's weak operating environment expected to affect banks.
- Moody's drops outlook on top Nigerian banks' long-term deposit ratings to negative from stable.
- The rating firm also identifies factors that could change the ratings for Nigerian banks.
Moody's Investors Service has said that Nigeria's weak operating environment posed a challenge to the banking sector in maintaining the recent improving trend, particularly as regards asset quality, given the increasing bank lending.
With the challenging environment and recent changes in the outlook on Nigeria's ratings to negative, the rating firm has dropped its outlook on top Nigerian banks' long-term deposit ratings to negative from stable.
The banks are Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Plc, Union Bank of Nigeria Plc, Fidelity Bank Plc, FCMB (First City Monument Bank) Limited and Sterling Bank Plc.
Why the negative ratings for Nigerian banks
“The rating action follows Moody's decision to affirm Nigeria government's long-term issuer ratings of B2 and change its outlook to negative from stable on 04 December 2019,” the rating agency said.
However, the firm affirmed the B2 long-term local currency deposit ratings for the banks.
“The affirmation of the ratings reflects the banks' financial profiles which have been generally resilient to the difficult operating environment in Nigeria. On average, the Nigerian banks benefit from good pre-provision profitability and capital positions; asset quality and foreign currency funding positions have improved over recent quarters, following the recession in 2016.
“The change of outlook to negative from stable reflects the Nigerian banks' sizeable exposure to the sovereign debt securities and loans, averaging at 244% of the rated banks' capital bases as of June 2019, which links their credit profiles to that of the government,” according to a statement made available to Business Insider SSA on Friday.
What could change the ratings for Nigerian banks
Moody's said any deterioration in the creditworthiness of Nigeria would exert downward pressure on the banks' ratings, given their large holdings of sovereign debt securities. In addition, the banks could be downgraded if operating conditions are expected to worsen than is currently anticipated, constraining banks’ business activities while leading to higher asset risk and provisioning costs.
On the flip side, any upwards rating momentum of the banks' ratings is limited given the negative outlook. However, some of the banks' outlooks could change back to stable if the sovereign rating outlook is stabilized and the banks maintain their resilient financial performance.
How these ratings affect the Nigerian economy and individuals
Nigerian banks play a significant role in the activities of individuals, businesses, and the nation's economy. The sector serves as one of the key engine rooms, offering finances to borrowers for investments to grow .