Fitch Ratings: Forex liquidity risk may affect credit rating of Nigerian banks

Fitch Ratings, a global credit rating agency, predicts a risk in the rating of Nigerian banks due to foreign currency liquidity.

Fitch, in a statement released on Tuesday, said funding, liquidity and deposit growth of African banks would remain stable since “banks are generally more liquid due to slower loan growth and risk aversion.”

“Foreign-currency liquidity risks have not materialised, particularly in Nigeria but present a significant risk to banks’ ratings,” the statement read in part.

Fitch said the 2021 sector outlook for banks in Africa is stable as they see a gradual recovery with business volumes and revenue picking up.

It warned that Nigeria may likely witness an rise in impaired loans, especially in consumer and small and medium sized enterprises (SMEs) loans.

A loan is impaired when it is likely that a bank or lender will be unable to collect the full value due, including both interest and principal.

“The most likely scenario is the active restructuring of large corporate loans preventing a sharper hike in impaired loans,” the statement read.

“Such flexibility will not be afforded to consumer and SME loans and these segments will drive higher impaired loans over the longer term.

“Impaired loan ratios could head towards low double digits in some countries, particularly in Nigeria and Morocco.”

However, the agency also said that a return to pre- pandemic levels may not occur for at least 2 years as asset quality will deteriorate because of the challenges of the COVID-19 pandemic on households and businesses, coupled with the expiry of temporary debt-relief measures.

Fitch explained that despite large credit losses, most African banks would remain profitable as they still retain a healthy revenue generation capability, adding that rebuilding of earnings will be slower for South African banks.