(The following statement was released by the rating agency)
LONDON, April 07 (Fitch) Regulatory stress test results
highlight disparities in
capital strength across the Nigerian banking sector, with large
collectively much more resilient to stresses than small ones,
The results, published on 5 April, show that medium and large
could withstand a 100% increase in non-performing loans (NPLs)
but small banks
(assets less than NGN500 billion) would struggle to withstand
even modest NPL
deterioration. In our own assessment of the banks we rate, which
large (assets more than NGN1 trillion), capacity to absorb
capital varies considerably. Zenith Bank Plc is stronger than
the rest, while
capital weaknesses at First Bank National and Diamond Bank have
influence on their ratings.
All Nigerian bank ratings are in the highly speculative 'B'
range, but even so
capitalisation is an important differentiator. The scores we
assign, based on
capitalisation and leverage metrics across the sector, are low,
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The Central Bank of Nigeria (CBN) stress tests assessed the
ability of banks'
capital adequacy ratios to withstand a number of credit shocks.
These include a
general rise in NPLs, specific deterioration among banks' five
and defaults in the oil and gas loan portfolios. As a group,
small banks were
particularly badly hit in the stress tests. They already had
very weak starting
capital positions, with an average capital adequacy ratio (CAR)
of just 3.14% at
end-2016, following sharp falls in 2016 due to rises in NPLs.
Medium and large
banks had stronger starting positions, with CARs of 12.75% and
respectively, at end-2016.
CBN figures show that NPLs represented 14% of total sector loans
at end-2016, a
very sharp increase on 5.3% at end-2015. Unreserved NPLs
represented a high
38.4% of total end-2016 regulatory capital (end-2015: 5.9%),
considerable weakening in the overall capital position of
Reported NPL ratios do not tell the whole asset quality story.
particularly of loans extended to the troubled upstream oil
sector, is fairly
common practice in Nigeria, and restructured loans at some rated
for as much as 20% of total loans. Not all restructured loans
will go bad, but
in our opinion the portfolios are higher risk, suggesting that
at banks may be weaker than reported ratios suggest. The oil and
accounts for 30% of total banking sector credit in Nigeria.
Not all news relating to capital at Nigerian banks is negative.
The banks remain
profitable, with results boosted by wide margins and currency
large in some cases. These are one-off gains but they have been
provide a strong boost to capital, which is positive, especially
in light of
weak asset quality.
The quality of management at Nigeria's leading banks is solid.
with management highlight that steps continued to be taken to
and address loan-quality issues during 1Q17.
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The above article originally appeared as a post on the Fitch
Wire credit market
commentary page. The original article can be accessed at
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