Despite rising risks of delinquent loans in the industry, Deposit Money Banks (DMBs) in Nigeria shown a significant preference for investing in government bonds and other fixed income assets over lending.
The Central Bank of Nigeria’s (CBN) 65% loan-to-deposit ratio may not have affected local lenders’ demand for loans, according to a new research from FitchSolutions on the banking forecast for Sub-Saharan Africa through 2024.
Lending demand was dampened by rising economic uncertainty, and many banks focused their efforts on strengthening their balance sheets. Problem loans are quickly developing from stage 2 loans. Increased impairment costs on credit losses were reported by certain institutions.
Although an environment with higher interest rates has helped banks’ net interest margins, operators have seen an increase in default risk as a result of poor macroeconomic data. In the fourth quarter of the year, analysts anticipate a certain degree of credit migration for certain banks, particularly for lenders with significant exposure to foreign exchange in risky industries.
The minimum loan-to-deposit (LDR) requirement was imposed by the Central Bank of Nigeria (CBN) due to the increased risk aversion of Nigerian banks, as per the experts’ research.
Since many banks are not making use of their reserves, the CBN declared in July 2023 that it will enforce the minimum LDR of 65.0% more severely. This should encourage lending and boost economic activity.
FitchSolutions said it is unlikely to see Nigerian banks go above the 65.0% threshold too aggressively, for fear of loan delinquencies and as banks continue to favour investing in high-yield government bonds as opposed to riskier lending.
“We also think that Nigeria’s reform drive is unlikely to regain momentum in 2024, weighing on banking sector activity”, analysts said in the report. The devaluation of the currency in June 2023 failed to address imbalances in the currency market which exacerbated dollar shortages and significantly weighed on capital ratios by inflating banks’ risk weights.
“As we do not expect the official exchange rate to converge towards the parallel market rate anytime soon, dollar shortages will continue to affect banks in 2024”, FitchSolutions said. Nigeria Eurobond Slumps after CBN Resumes OMO Auction
Analysts said on top of this, a number of other challenges facing the banking sector, including deteriorating capital, worsening loan quality; struggle to attract cash to the official banking sector. At 85.1% as of June 2023, the report noted that the majority of money in circulation remains outside the banking sector and a high-operating-cost environment.
“That being said, Nigeria’s banks continue to perform well despite these challenges, posting strong profits in recent years. We expect that this trend will continue in 2024 due to high net interest margins and strong revenues from high yields on government bonds”, analysts said in the latest report on Sub-Saharan Africa.