Subpar economic recovery seen piling more pain on Nigerian banks

Published 14 Oct,2020 via Bloomberg Markets - Nigeria’s economy is poised to expand at less than half the pace needed by banks next year to avoid a possible spike in unpaid loans.

The 2021 outlook for sub-Saharan Africa’s largest economy was cut to growth of 1.7% by the International Monetary Fund on Tuesday, compared with a June forecast of 2.6%. That’ll make Nigeria the fourth-worst performer among nations measured by the Washington-based lender in the region.

Lenders need the economy to accelerate after restructuring about 40% of loans on their books that would’ve soured and should have been booked as non-performing loans. As growth lags, the risk of these reorganized loans going unpaid rises.

“There’s no real sense the economy will bounce back to 4% to 5% growth,” Ronak Gadhia, director for sub-Saharan African banks research at EFG-Hermes, said by phone. “We expect banks’ credit quality to remain under pressure.”

Nigeria’s gross domestic product will probably shrink 4.3% for this year, the IMF said, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortages weigh on output. GDP last expanded by more than 3% in 2014.

The central bank anticipates that almost two-thirds of credit in the economy will be reorganized this year to help borrowers cope with the economic fallout from the pandemic. EFG expects NPLs will rise to 7.6% of total credit at the end of the year, as the economy deteriorates, increasing impairment charges, Gadhia said.

The Cairo-based brokerage predicts that Nigeria’s GDP will increase by 1% to 2% in 2021, “which is very low, and doesn’t help the banks from an asset-quality perspective,” the analyst said. Earnings per share at Nigerian banks could decline 65% this year, Gadhia said.

The government doesn’t have the financial resources to support the economy, said Yvonne Mhango, the sub-Saharan Africa economist for Renaissance Capital.

“Nigeria’s recovery will be undermined by a consumer who was already in recession pre-Covid-19,” she said, adding that wholesale and retail trade has contracted for four straight quarters. A drop in remittances from Nigerians living abroad, which accounts for 6% of GDP, will further weigh on the consumers.

“Nigeria’s deteriorating fiscal position also implies a weak and slow recovery,” Mhango said. “Nigeria’s government revenue is peculiarly low. This significantly constrains spending.”

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