Nigerian banks’ operating environments could deteriorate in 2022–2023 as adverse global economic conditions feed through to the local economy, Fitch Ratings says in a new report.
Soaring inflation led the Central Bank of Nigeria (CBN) to raise its benchmark rate by 150 basis points (bp) on 24 May, and the pressures on banks’ profitability and asset quality will be higher than we had initially expected for 2022.
Global Stagflation Risk Banks in Nigeria, like those in other emerging and frontier markets, could face a deteriorating operating environment in 2022–2023 as adverse global economic conditions feed through to the local economy and operating environment.
This is despite the sharp rise in oil prices in 2022 boosting Nigeria’s economy. Fitch Ratings believes it could be difficult for the banks to maintain their performance momentum from 2021, when strong profitability was shaped by low credit costs and strong loan growth as the economy rebounded after the pandemic shock. High inflation and a potential economic slowdown could put pressure on borrowers, to the detriment of the banks’ asset quality. Inflationary concerns led the Central Bank of Nigeria (CBN) to raise its benchmark rate by 150bp to 13% on 24 May 2022, the first increase since 2016.
However, the sharp rise in oil prices this year will mitigate the economic impact from the global risks, and we do not expect Nigeria’s banking sector to experience a material shock.
High inflation and a potential economic slowdown will put pressure on borrowers, to the detriment of the banks’ asset quality. Inflationary concerns led the CBN to raise its benchmark rate by 150 basis points (bp) to 13 per cent on 24 May, the first increase since 2016. We expect interest rates to increase further given accelerating inflation and tighter global financial conditions. This should support the banks’ net interest margins, which have been dented by low rates in recent years.
As a major oil exporter, Nigeria should see a boost to its economy and foreign exchange reserves from the current very high oil prices. However, low production and high import costs for refined products, and the need to subsidise households and businesses, will limit the benefits.
