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Nigerian Banks Likely to Weaken – Fitch

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Global rating agency, Fitch Ratings, has said that key financial metrics reported by Nigerian banks are likely to weaken in the closing months of 2015.

Fitch also added that despite the decision by the Monetary Policy Commitee (MPC) of the Central Bank of Nigeria (CBN) to reduce the cash reserve ratio (CRR) to 25 per cent, down from 31 per cent, this will not add liquidity to the banking system.

In a statement, Fitch said “Public sector deposits traditionally account for around 10 per cent of total banking sector deposits.

“Lower reserve requirements will not offset the tighter FC liquidity at Nigeria’s banks. A currency split of public sector deposits is not disclosed but in our opinion, FC deposits are substantial, held up by oil-related deposits.

“The centralising of public sector and government-related FC deposits at the TSA has made it increasingly difficult for commercial banks to meet customer demand for FC.

“FC availability was already strained in 2015 due to falling oil revenues, central bank action to defend naira depreciation and heightened negative investor sentiment towards emerging markets.

“Warnings throughout the year that JPMorgan intended to remove Nigeria from its Emerging Markets index, which occurred in mid-September, also triggered heavy FC outflows as investors sold Nigerian securities.

“Key financial metrics reported by Nigerian banks are likely to continue to weaken in the closing months of 2015. Impaired loans have been rising over the past 12 months. We expect them to rise above the central bank’s five per cent of total loans cap but to remain below 10 per cent at year-end.

“Pressure is mounting on regulatory capital ratios and we expect tier 1 capital ratios at many banks to fall below 15 per cent, which is low by recent Nigerian standards.

“Loan growth is slowing under the strain of lower oil prices. Our expectations for loan growth are muted – a nominal five per cent increase in 2015, which is low by Nigerian standards – due to the much deteriorated operating environment.”

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