Daily Times

LAGOS: Godwin Emefiele urged Nigerians not to panic about the banking system and said that any trouble resulting from the economy crisis will be dealt with.

For now, depositors and investors are generally giving Central Bank of Nigeria Governor Godwin Emefiele the benefit of the doubt after he shored up mid-tier lender Skye Bank this month with a loan and replaced its management when its capital fell below levels required by regulators.

But pressure is building, with loan books – nearly half of them in dollars – hammered by shrinking economy, plunging currency and foreign exchange shortages, all a consequence of the slump in the oil price for Africa’s top crude producer. 21 Nigerian banks have reduced their staff, closing branches and slashing earnings forecasts, but some are unlikely to survive the storm, analysts say.

Non-performing loans are expected to jump by 12.5% this year, up from the central bank’s target level of 5% at the end of last year, as lenders suffer a hangover from an oil sector credit boom that ended abruptly in 2015, according to Agusto and Co, Nigeria’s main rating agency.

“It will affect their profitability initially and eventually it is going to affect their liquidity and solvency,” said Lagos-based consultancy Financial Derivatives Chief Executive Bismarck Rewane, “Because of the squeeze in profitability, there will be a natural consolidation and a shake out.”

Any banking sector’s failure would have far-reaching consequences in the nation of 170 million, with civil servants’ pay routed through the banks and residents of remote villages dependent on electronic systems for routine payments.

Sterling Bank Chief Executive Abubakar Suleiman said that a 20% drop in naira would trigger waves of bank mergers and the currency lost double that against the dollar in the last month’s devaluation. Overall, 42% of loans extended by the Nigerian banks are in dollars.

If the naira falls far enough, it will force some banks to recapitalise to have enough naira to stay within the financial stability limits. “There is a concern around the evolution of banks’ capital adequacy if the naira continues to weaken,” said Standard Chartered Africa Chief Economist Razia Khan.

– DELAYED RESULTS –

According to London-based analysts Exotix, UBA, Diamond and Guaranty Trust Bank (GTB), which is Nigeria’s biggest bank by market capitalisation, have the highest ratio of dollar loans, at 50% apiece.

Diamond declined to comment, while UBA and GTB said they saw no need for a recapitalisation due to the devaluation. One Lagos-based banking analyst, who asked not to be named, said three or four medium-sized banks might need to raise capital.

Two mid-tier banks, Skye and Stanbic – the local arm of South Africa’s Standard Bank – said they had not yet released first quarter earnings. Some banks have themselves borrowed heavily in dollars, debts that now costs much more to service.

GTB tops the list with $1.6 billion debt, followed by First Bank of Nigeria with $915 million, according to Thomson Reuter’s data. First Bank was not immediately available to comment.

Anticipating problems from a weaker naira, investors have been selling off banking stocks for the last year, sending the banking index in January to its lowest since it was formed in 2009 and less than half its level in mid-2014.

Many banking stocks – hot foreign investor picks a decade ago during an ‘Africa rising’ boom – remain depressed after a 2009 sector melt-down stemming from the global financial crisis.

Zenith shares are a third of their pre-financial crisis highs, Access a quarter, and First Bank just 10%. GTB, by contrast, has recovered as it has one of the lowest levels of non-performing loans and its shares are now in line with their 2008 levels.

– “DON’T PANIC” –

With the IMF forecasting a 1.8% contraction in the economy this year, the immediate prospects for the banking sector are grim but Emefiele was adamant that the financial system remained solid.

“The strategic health of the Nigerian banking or financial system remains strong and there is no need for anybody to panic or worry that the banks are in distress,” he said.

“Depositors of banks, please, please endure. We appeal to you to go about your business. You will not lose your deposits in any bank,” he said.

However, his soothing words, which followed a rush by depositors to withdraw funds from Skye earlier this month, may have the opposite effect, especially after police raided three banks in May – Access, Fidelity and Sterling – as part of a probe into alleged illegal transactions.

“The moment you start saying it, it raises eyebrows – why are you saying that?” Financial Derivatives’ Rewane said. Another problem is the lack of transparency over loans to directors and shareholders.

The Nigeria Deposit Insurance Corporation – an independent federal agency – said that it was concerned over the increasing wave of non-performing insider loans in various banks and its consequences for the stability of the nation’s banking systems.”