International rating agency, Fitch has credited lending growth slowdown in the Nigerian banking sector as a good sign as this has reduced the pressure on asset quality and capital.
According to Fitch Rating Agency on Wednesday, “A more pedestrian pace of credit origination helps the banks avoid asset-quality problems and places less strain on capital.”
“The Central Bank of Nigeria’s policy of keeping benchmark interest rates at a record high this year had helped stabilise the naira and reduced loan supply and demand”, Cynthia Chan and Denzil De Bie, London-based analysts for the ratings company, said.
Fitch Ratings however says it “expect loan growth to be subdued until (second half of 2013)H213, as the market adjusts to the higher interest rates following the expiration of the inter-bank guarantee from the Central Bank of Nigeria (CBN) last year. The higher interest rates reflect heightened lending risks in the inter-bank market and greater competition for funds. The 91-day Nigerian Treasury bill yield jumped to the 13-16 per cent range in October 2011, having traded below 10 per cent during the previous 12 months”.
A statement released by the rating agency indicates that “The high interest rates helped stabilise the currency but have dampened both loan supply and demand. Underlying credit, excluding loans sold to the Nigerian “bad bank” – the Asset Management Corporate of Nigeria (AMCON) – and write-offs, grew on average by a rapid 44 per cent in 2011 for the banks we rate. By contrast, the annualised rate this year (based on the first nine months) averages 16 per cent, below the rate of inflation-adjusted economic growth.”
According to Fitch, there are two notable outliers among the Fitch-rated banks in Nigeria.
First Bank of Nigeria boosted its loan book by an annualised 30 percent in 9M12, reflecting a strategic shift to move up the risk curve and expand its franchise in the mid-corporate market. “We believe First Bank’s dominant domestic franchise and acceptable levels of capital will support its growth plans,” it said.
Fitch said a change in strategy also led Diamond Bank to rapidly expand its credit portfolios, with loans up by 51 per cent on a comparable basis. Diamond’s liquidity and capital positions are likely to come under strain as it expands into large corporate lending.
“Other Nigerian banks are refraining from unnecessary risk-taking while the borrowers adjust to higher costs. High-quality corporate clients have been traditionally lucrative, as they provide banks with access to the clients’ suppliers, distributors and employees. But many banks have been less active in this segment recently because the clients are used to borrowing at 10-12 per cent, which is lower than the return offered by government securities.”
“The stabilisation in credit growth reduces a build-up of risk so soon after the balance sheet clean-ups in 2010 and 2011 where (non performing loans), NPLs were transferred to AMCON. Credit booms in Nigeria have historically involved a relaxation of underwriting standards and an accumulation in portfolio concentration for the banks. We believe a slower pace of loan growth lowers the risk of a relapse in NPLs.”