In a statement on Wednesday, it noted that banks faced multiple threats from the operating environment in 2016, including Nigeria sliding into recession, the economy continuing to suffer from low oil prices and severe shortages of foreign currency.
The agency said the banks struggled with declining operating profitability (excluding translation gains), sluggish credit growth, fast asset quality deterioration, tight foreign exchange liquidity and weakening capitalisation, putting increasing pressure on their credit profiles.
“The outlook for the rest of 2017 is not much brighter. We believe that the banks will continue to face extremely tight foreign currency liquidity despite the authorities’ best efforts to normalise the foreign-exchange interbank market and improve the supply of United States dollars,” Fitch said.
It noted that deliveries under the Central Bank of Nigeria’s forex forward transactions since the first half of 2016 had helped the banks access US dollars and reduce a large backlog of overdue trade finance obligations to international correspondent banks.
The agency, however, said that given the severity of the foreign currency liquidity issues, refinancing risk remained at the top of its perceived risks for the sector, especially as some banks have large Eurobond maturities in 2017/2018.
Fitch said, “Fast asset quality deterioration is in line with our expectations given the macro challenges and the continuing issues in the oil sector. Oil-related impaired loans are high and this excludes large volumes of restructured loans.
“Other industry sectors contributing to non-performing loans include general commerce and trading, which have been affected by both the naira depreciation and foreign currency shortages.”
It said for the Fitch-rated banks, the NPL ratio could rise to 10 per cent to 12 per cent by end of the first half of 2017.
The agency said as a one-off policy change, the CBN allowed banks to write off all fully reserved NPLs by end-2016.
It said, “Together with significant loan restructuring (particularly in the oil sector), this will ease pressure on NPLs for now, in our view. Slower economic growth and a lower risk appetite from banks will continue to translate into subdued credit growth and weak core earnings generation in 2017.”
According to Fitch, loan growth averaged 25 per cent in the first nine months of 2016, but this was due to the currency translation effect post-devaluation as about half of sector loans are in foreign currencies.
It said loan growth was negligible in constant currency terms, adding that the banks’ 2016 profitability was underpinned by large translation gains booked on net long foreign currency positions following the naira devaluation.
“Excluding these, some banks would have reported a significant fall in operating income,” the agency said.
It further said, “Regulatory capital ratios are high from a global perspective, but remain under pressure due to inflated risk-weighted assets (due to the foreign currency translation effect) and lower core retained earnings.”