Owing to the rise in global oil prices which picked up this year, and Nigeria’s recent adoption of a more flexible foreign exchange policy, Moody says the outlook for Nigerian banks will be stable. In a report published this week, titled “Banking system outlook-Nigeria”, Moody’s says there has been a stability in funding for foreign currency in Nigerian banks, and liquidity risks have reduced, meaning that the rating agency predicts a steady growth.

“Despite the stabilization in banks’ foreign currency funding and liquidity profiles, Moody’s expects bank earnings to come under pressure. Capital metrics will also decline marginally over the 12 to 18 month outlook period. Additionally, asset quality will remain weak, but a further deterioration in loan performance will be marginal as operating conditions slowly improve,” the report reads.
Moody’s is a credit rating and research agency that uses its ratings to “provide investors with a simple system of gradation by which future relative creditworthiness of securities may be gauged.” Moody’s ratings are indicators to investors on the investment environment of national economies.

Moody’s banking system outlook examines what a country’s bank creditworthiness will look like in 12 to 18 months. And after also predicting at the start of last year that Nigeria’s banking system would have a stable outlook in 2017, 2018’s report means Nigerian banks’ creditworthiness is steadily growing.

“Operating conditions for Nigeria’s banks will continue to gradually improve over the next 12 to 18 months, but remain challenging,” said Akin Majekodunmi, Vice President and Senior Credit Officer at Moody’s, who is also Nigerian. “Nigeria’s growth prospects remain vulnerable to global oil prices, as crude oil will remain the nation’s largest export commodity and its main generator of foreign currency for the foreseeable future.”

However, bank earnings will decrease in the next 12 to 18 months due to “lower yields on government securities” and “likely reduction in income from derivatives.” The report also says, due to the recovery from recession in Nigeria last year, which was characterized by a slow economic growth, non-performing loans in Nigeria’s banking system will increase. The rating agency expects these loans to range between 15.5 percent and 18 percent of aggregate loans taken in the next 12 to 18 months.

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