Are Nigeria’s banks expanding too fast after the cleanup?

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After the crisis of 2009, Nigeria’s banking system has been cleaned up, with the sector performing impressively this year. So everything’s fine?

Not quite, according to a new report by the ratings agency Fitch. Rapid credit growth in Africa’s most populous country could carry the risk of weakening bank asset quality.

Credit has grown at a rate of 30-66 per cent in the banks monitored by Fitch during 2011 and according to Denzil De Bie, a director in Fitch’s Financial Institutions team, this could become a source of problems if left unchecked. In Fitch’s view, many Nigerian banks’ core capital levels are “lower than is appropriate for Nigeria’s difficult operating environment.”

Such warnings touch on bad memories. From the mid-2000s there was a lending spree based on increased deposits from oil revenue, a lax regulatory regime, and a stock-market boom which increased the market capitalisation of listed banks nine times between 2004 and 2007.

Unsecured credit was extended to the downstream oil sector, political elites, and friends and family in what the governor of the Nigerian central bank, Lamido Sanusi, later referred to as “monumental fraud”. The bubble burst as the stock market fell by 70 per cent in 2008-09, causing 10 banks, accounting for 40 per cent of banking system, to fail. A subsequent investigation by the central bank found that many were giving a misleading impression of the quality of their assets.

Clearing up the toxic assets was an expensive exercise, involving several bailouts, mergers, high-level firings at major institutions, and an $11bn sale of non-performing loans from the books of the commercial banks to the hastily established Asset Management Corporation of Nigeria (Amcon). The total price tag for the cleanup is estimated as $21.5bn.

As beyondbrics previously reported, the efforts have led to a dramatic turnaround for Nigeria’s banks, with strong revenue growth across the sector. Earlier this year Standard and Poor’s gave the sector a positive report, praising the improvements in corporate governance and regulatory oversight.

The upside does carry risks though. As De Bie says, “there is probably some pent up demand, and combining this with country GDP at 8 per cent and inflation at 12 per cent, you would expect significant credit growth. The concern is that it goes on unchecked.”

It is unlikely, he says, that Nigeria will see a re-run of its 2009 banking crisis, since Amcon has addressed the most serious underlying problems. “For the time being”, he says, “the problem is not very serious, what I’m trying to flag is the potential risks from rapid credit growth, particularly in country like Nigeria where risk is concentrated.”

Research carried out for the report found that in most of the banks examined, the 20 largest loans typically accounted for 30 – 50 per cent of gross advances. This means, De Bie says, “one bad loan can have a significant impact on your balance sheet. You don’t need to have a portfolio go under, you only need one or two large credits and a bit of bad luck.”

The additional danger is that rapid credit growth, which is expected to continue into 2013, would hide any significant weakening in asset quality and eat into capital ratios, which are being further undermined by what Fitch calls “generous dividend policies”.

Another analyst following the Nigerian banking system told beyondbrics, ”If you want credit growth to track well above nominal GDP you need infrastructure projects to come through as these will sustain good quality assets. If that doesn’t come through, we would question the quality of the loans.”

Much will depend upon the effectiveness of the new regulatory system, he says: ”Sanusi has revamped the central bank and as part of clean up he has sought to clean up risk management and corporate governance. The issue now is that it is untested.”


In : Finance

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