Nigeria: Fitch warns of rising Banks’ NPL amid inflation, rates hike

In its latest report, Fitch Ratings has projected that Nigerian banks will face an uptick in non-performing loans (NPLs) in 2024, as inflation and high-interest rates continue to weigh on the country’s economy.

This development is likely to challenge the financial health of the sector, even as Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) remains affirmed at ‘B-’ with a Positive Outlook.

The report notes that the proportion of loan assets within Nigeria’s banking sector has remained relatively modest, accounting for only 35 per cent of total assets by the end of 2023.

Fitch commented that this lower loan volume could buffer banks against significant instability, though the agency foresees an uptick in non-performing loans due to economic pressures.

“Fitch expects the banking sector’s regulatory non-performing loans (end-1Q24: 5.1 per cent) to increase in 2024 due to high inflation and interest rates,” the report stated.

The Central Bank of Nigeria (CBN) has also introduced heightened capital requirements, set to be fully enforced by the end of the first quarter of 2026, as a way to ensure resilience within the sector.

This policy is compounded by the recent amendment of the 2020 Finance Act, which levied a 70 per cent windfall tax on banks’ foreign exchange gains in 2023 and first quarter of 2024.

Fitch noted that these requirements are unlikely to cause capital adequacy ratio breaches, though they will certainly test banks’ profit margins in the near term.

Industry analysts have pointed to Nigeria’s climbing inflation as a critical factor impacting the banking sector’s loan performance.

Inflation reached 32.7 per cent in September 2024, reversing the downward trend observed earlier in the summer. This rise is mainly attributed to higher fuel prices, which have led to increased transportation and food costs.

Food inflation alone has surged to 37.77 per cent year-on-year, up by over seven percentage points compared to the same period in 2023.

“High inflation is eroding disposable income, which impacts loan repayment capacity across various sectors,” noted financial analyst Olumide Adebayo.

He added that Nigerian banks’ reliance on higher interest rates for earnings will continue to face strain as more customers struggle to meet loan obligations.

Since assuming office, CBN Governor Yemi Cardoso has aggressively raised the Monetary Policy Rate (MPR) as part of efforts to counter inflation.

The CBN has implemented five rate hikes, raising the MPR from 18.75 per cent to the current 27.25 per cent over a span of several months, including a recent 50-basis point increase by the Monetary Policy Committee (MPC) in September 2024.

These cumulative increases, totaling 850 basis points, are part of a broader monetary tightening strategy intended to stabilize core inflation and manage food price increases.

Dr. Adenike Ogundipe, an economist at the Nigerian Institute of Economic Research, emphasized that while these rate hikes demonstrate the CBN’s commitment to tackling inflation, they also increase borrowing costs for both consumers and businesses.

“The higher interest rates make loans more expensive, which adds pressure to businesses’ operational costs and to consumers, already squeezed by inflation,” she added.

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