Nigerian banks and Economic Recovery and Growth Plan

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The Federal Government launched the Economic Recovery and Growth Plan with the vision to “drive a structural economic transformation which lays emphasis on improving both public and private sector efficiency”.  In order to achieve three broad strategic objectives of “restoring growth, investing in our people and building a globally competitive economy”, the Plan outlines five key Execution Priorities namely: Stabilising the macroeconomic environment; Achieving Agriculture and Food Security; Ensuring energy sufficiency in power and petroleum products; Improving transport infrastructure as well as Driving industrialisation through Small and Medium Enterprises. Accordingly, the GDP is expected to grow by 2.19 per cent in 2017, average 4.62 per cent annually before reaching seven per cent by 2020.

We are looking at the prospects for the banking sector growth during the Plan period.

As recently disclosed by Fitch Ratings, banks in Nigeria are grappling with declining operating profitability, weakening capitalisation that puts increasing pressure on their credit profiles; high refinancing risk given that some banks have large Eurobond maturities in 2017/2018; sluggish credit growth on account of contraction in GDP and a lower risk appetite by banks; tight forex liquidity and fast asset quality deterioration exacerbated by oil-related impaired loans in the wake of weakening macroeconomic fundamentals. Other industry sectors contributing to non-performing loans include general commerce and trade, which have been affected by both the naira depreciation and foreign currency shortages.

Recent reports say Etisalat Group has officially decided to pull out of Nigeria after the company defaulted on a loan of US$1.2bn syndicated from 13 banks in 2013. Only a few days ago, the Central Bank of Nigeria released an exposure draft framework for the establishment of Private Asset Management Companies to tackle the over N2tn non-performing loans in the banking sector. In order to reduce the prevalence of loan defaults, the CBN, under the Plan, is expected to  “improve asset quality and reduce non-performing loans through proper asset screening to lower the NPL as a ratio of total banking system loans from the current level of 12 per cent to the prudential threshold of five per cent by 2020”. The CBN will also “continue regular stress tests to detect early bank warning signs on systemic risks, and offer ways to deal with such risk.”

As noted by Fitch, “the largest Nigerian banks with stronger and more diverse business models, high revenue-generating capacity and stronger liquidity profiles appear to be coping better than smaller banks on most metrics. However, tail risks remain high for all banks due to their sensitivity to concentration risk”. Indeed, deposit money banks in Nigeria need to diversify their loan portfolio to be able to address this risk. In view of the fact that some of these outstanding loans are traceable to companies that borrowed money to execute government contracts, the government has made provision in the ERGP to “issue bonds and debt certificates to address outstanding Federal Government liabilities especially to contractors, MDAs and state governments”.