Credit ratings agency Fitch has projected an increase in non-performing loans (NPLs) for Nigerian banks in 2024, citing the country’s high interest rates and ongoing inflationary pressures. In its latest credit ratings report on Nigeria, Fitch affirmed the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-’ with a Positive Outlook.
According to the report, Fitch expects the banking sector’s regulatory non-performing loans (NPLs) to rise from their current levels—estimated at 5.1% by the end of Q1 2024—due to the economic challenges posed by high inflation and interest rates. The agency noted, however, that loan books in the sector remain relatively small, accounting for just 35% of total banking sector assets by the end of 2023, which could help limit the overall impact on capital adequacy.
Inflation and Interest Rates Driving NPLs Higher
Fitch’s outlook for the Nigerian banking sector highlights concerns about the growing risk of defaults, exacerbated by the high cost of credit. Nigeria’s inflation rate surged to 32.7% in September 2024, reversing a two-month slowdown, largely driven by rising petrol prices and transportation costs. Food inflation also saw a significant spike, reaching 37.77% year-on-year, contributing to the overall economic strain on both businesses and consumers.
In response to these inflationary pressures, the Central Bank of Nigeria (CBN) has implemented a series of interest rate hikes, raising the Monetary Policy Rate (MPR) to 27.25% in September 2024. These rate hikes, which have totaled 850 basis points since the beginning of Yemi Cardoso’s tenure as CBN Governor, are part of the CBN’s efforts to curb inflation and stabilize the economy.
Fitch has indicated that these measures, alongside other prudential tools like open market operations, are likely to continue in the final quarter of 2024. Despite the higher interest rates, Fitch expects that the Nigerian banking sector will avoid breaches in capital adequacy ratios, thanks to the CBN’s oversight and the planned capital increases for banks.
Impact of Recent Regulatory Changes
The report also referenced the CBN’s decision to increase the capital requirements for Nigerian banks, which is set to be completed by the end of Q1 2026. Additionally, the 70% windfall levy imposed on banks’ foreign exchange gains in 2023 and Q1 2024 was also noted. While these regulatory changes could add further financial pressures, Fitch does not expect them to result in any significant breaches of banks’ capital adequacy ratios.
Economic Context and Bank Performance
The forecasted rise in NPLs is a reflection of broader macroeconomic challenges, including inflationary pressures and tightening monetary policy. However, the banking sector’s relatively small loan books and strong regulatory oversight are expected to mitigate some of the risks. The sector will continue to face challenges as inflation remains elevated, with food prices and transport costs hitting both businesses and consumers hard.
Despite these risks, Fitch’s Positive Outlook on Nigeria’s Long-Term Foreign-Currency IDR suggests a cautious optimism about the country’s ability to stabilize its economy. The report highlights ongoing reforms in the banking sector and the broader economic landscape, which could help improve the financial health of both banks and the country in the long term.
What You Should Know
- Nigeria’s inflation rate reached 32.7% in September, driven by a rise in petrol prices, with food inflation reaching 37.77% year-on-year.
- The CBN has raised the MPR multiple times under the leadership of Yemi Cardoso to combat persistent inflation, with the most recent increase bringing the rate to 27.25% in September 2024.
- Fitch expects the rise in NPLs in 2024 due to the high interest rates and inflationary pressures, but notes that loan books are still relatively small in comparison to total banking sector assets.
- Regulatory changes, such as the 70% windfall levy and new capital requirements, are expected to have a limited impact on banks’ capital adequacy ratios.
As Nigeria grapples with inflation and rising interest rates, the banking sector’s resilience will be tested in 2024. The ability of Nigerian banks to manage growing NPLs while adapting to the evolving economic landscape will be crucial to the sector’s stability.
