Moody’s Ratings cautions Nigerian banks, says loan concerns persist

Agency Report

Moody”s Ratings have warned that Nigerian deposit money banks are holding unknown quantities of legacy exposures after the Central Bank of Nigeria’s (CBN) forbearance that was granted during COVID-19 and that concerns over lenders’ loan persists.

The global ratings agency stated in the note that recapitalisation of the banks will support, but also noted that concerns over Nigerian lenders’ loan quality persists.

“The recapitalisation will enable the banks to better absorb loan losses and increase their lending. They will also be in a better position to implement Basel III international banking regulations”, Moody’s said in a report obtained by from the rating agency.

According to MarketForces Africa, the plan is overall credit positive for the banking system but it will not fully allay concerns regarding the quality of banks’ loan portfolios. In the note, Moody’s said the top five banks in the sector, which together control over 80 per cent of sector assets, will likely raise the extra capital they require by early next year.

“But the next tier of banks – some of which also have international operating licenses – may struggle to meet the March 2026 deadline”, it added, noting that this will likely spur some sector consolidation.

With the recapitalisation, the banks will increase their capacity to absorb non-performing loans (NPLs), which stood at around 3.9 per cent at the sector level in June.

But they still hold unknown quantities of legacy exposures on their balance sheets that were granted regulatory forbearance during the COVID-19 pandemic, Moody’s said in the update.

While the Central Bank of Nigeria (CBN) has spoken about ending this forbearance, there has been little clarity as to when this will occur, the global ratings agency said.

Moody’s said industry-wide non-performing loans (NPLs) stood at 3.9 per cent in June 2024, down from 4.8 per cent in April 2024 and well below the five per cent maximum threshold that the central bank has set as industry standard.

“It is likely, however, that reporting of legacy non-performing loans is weak, given the forbearance granted to banks and other potentially problematic exposures that were successfully restructured but may not have been classified as non-performing under the previous CBN leadership.”

Moody’s said over the last 18 months, Nigerian banks have been buffeted by local currency devaluation, rising inflation, and other macroeconomic headwinds. The falling currency caused material capital depletion at the banks. Moody’s said this is because the inflation of foreign currency-denominated risk-weighted assets (RWAs) lifted the denominator of the capital adequacy ratio.

It has left some rated banks—FCMB and Fidelity in particular—close to a breach of the 15 per cent minimum capital adequacy ratio, generating concern over their solvency.

In response, and in line with earlier interventions in the banking sector, the CBN, under new governor Yemi Cardoso, issued a circular in March, stating that the country’s international banks must increase their minimum regulatory capital by 10x and domestic licensed banks by 8x.