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Nigeria banks: CBN update may have implications for asset quality

  • The CBN has announced six policy measures to address the economic impact of the Covid-19 pandemic.

  • 'Targeted, transparent and temporary' restructuring may lead to a rise in Stage 2 loans.

  • The CBN remains ready to provide liquidity to banks when required.

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

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Tellimer Research
17 March 2020
Published byTellimer Research

The Governor of the Central Bank of Nigeria (CBN) held a press briefing on 16 March. Six policy measures were announced to address the economic impact of the Covid-19 pandemic:

  1. A 1-year extension of the moratorium on principal payments on certain intervention loans.
  2. Reduction of interest rates on CBN intervention facilities to 5% from 9% for one year.
  3. Creation of a NGN50bn credit facility for households and SMEs. The CBN mentions hoteliers, airline service providers and health care merchants, but states that this facility will not be limited to these industries.
  4. Intervention facilities for the healthcare industry, including loans for drug production and for building healthcare facilities.
  5. ‘Temporary and time-limited’ restructuring of business and household loans by banks, particularly loans to oil and gas, manufacturing and agriculture companies.
  6. Continued focus on the loans-to-deposit ratio policy, which the CBN states has been successful at growing credit. The CBN will ‘further support’ bank funding and will consider ‘additional incentives’ for banks to extend longer-tenured facilities.

The regulator also emphasised its readiness to ‘provide liquidity backstops’ to banks. The CBN has not changed benchmark rates, and has not made further comments about the exchange rate (after the 12 March press release).

The impact of the CBN’s latest statement may be that restructured loans/Stage 2 loans rise, rather than non-performing loans (NPLs). However, as we have seen previously (in Nigeria and other countries), it is likely that the market will focus on the total of Stage 2 and Stage 3 loans, not just the reported NPL figure. The CBN is also reducing the interest rate on certain loans, as highlighted earlier. This may impact interest income at some lenders at a time when other revenue streams are already under pressure. We note that the reduction only applies for one year.

Turning back to asset quality, in our recent report, we ran a stress test for the four Nigerian banks with eurobonds outstanding. We assessed four scenarios – impaired loans doubling, and the percentage of impaired loans rising to 10%, 20% and 30% of gross loans. We assume that banks maintain a minimum equity/assets ratio of 8%. The test shows that all four banks could keep coverage ratios above 100% even if impaired loan ratios rise to 10%. For more details on this asset quality stress test, and our view on the potential impact of Covid-19 and lower oil prices on Nigerian banks, see the report here.