Said risk notwithstanding, Fitch noted that it does not expect the Nigerian banking sector to experience material shock/losses.
“Soaring inflation led the Central Bank of Nigeria (CBN) to raise its benchmark rate by 150bp on 24 May, and the pressures on banks’ profitability and asset quality will be higher than we had initially expected for 2022. However, the sharp rise in oil prices this year will mitigate the economic impact from the global risks, and we do not expect Nigeria’s banking sector to experience a material shock.”
Below are the specific ways the current global economic conditions could affect Nigerian banks:
- The prevailing high inflationary environment and a potential economic slowdown will put pressure on borrowers, albeit to the detriment of the banks’ asset quality.
- And in light of the rising inflation rate, Fitch said it expects the Central Bank of Nigeria to further increase interest rates; a development that would support banks’ interest margins.
As you should know, Nigeria is a major oil producing country in Africa. And with oil sales come a boost to the country’s foreign exchange reserves; especially now that there is a positive outlook for global oil prices.
Now, Nigerian banks need oil prices to be high, because this always helps to relieve pressure on bank assets. That’s because much of the banks’ loan exposure is to the Nigerian oil and gas sector. As a result, whenever the oil and gas sector underperforms, banks’ non-performing loans ratio skyrockets.
Also, note that the mainstay of the Nigerian economy is its oil and gas sector. The situation is such that whenever the sector is in distress, the rest of the economy suffers.
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