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Notwithstanding the buoyant 2016 financial results posted by Nigerian banks amid turbulent operating conditions, Fitch Ratings said today that significant financial risks persist in the sector.  

The ratings agency said banks recorded a healthy 2016 net income due largely to significant one-off revaluation gains after Nigeria devalued her currency in June. Furthermore, banks also made higher dollar core income (in naira terms) and booked sizeable foreign-currency trading income, which offset rising impairment charges.

“While the banks' performance ratios improved in the year, we note that a substantial part of earnings were non-recurring and will be difficult to repeat,” the ratings agency said.

Some of the factors affecting the long-term financial health of Nigerian banks are: the sharp increase in sector impaired loans given the extent of the country’s macro-economic challenges; worsening asset quality metrics, which have been mitigated by extensive loan restructuring, particularly to the oil sector; and low reserve coverage and high levels of foreign currency lending.

Fitch said some Nigerian banks are vulnerable to even modest shocks since capital buffers continue to be weak despite relatively high reported capital adequacy ratios (CARs).

“Year-end CARs declined due to the twin pressures of inflated risk-weighted assets (due to the revaluation of US dollar assets) and rising impairment charges, although this was partially offset by strong retained earnings, which benefitted from the revaluation gains,” the ratings agency said.

Nigerian banks also face funding and liquidity risks due mainly to tight FX liquidity notwithstanding the government’s attempts to normalise the foreign-exchange interbank market.

“For 2017, we believe there will be a slight easing on the banks' operating environment reflecting some early-stage improvements on the macro-economic front,” the ratings agency said. “We expect banks to remain profitable despite still modest credit growth and forecast further asset-quality deterioration, but at a slower pace. The big question is whether there will be improvement in FC (foreign currency) liquidity, but this to a large extent depends on factors beyond the banks' control.”