Fitch Ratings warns Nigeria about the profitability of its banks

On Thursday, January 4, Fitch Ratings warned Nigeria that its banks would struggle to sustain the same level of profitability in 2018 like in 2017 because of the reduction in government borrowing through treasury bills (T-Bills).

Fitch Ratings, which is an international credit rating agency whose ratings are used as a guide by investors as to which investments are most likely going to yield a return, published a report on the probability of Nigerian banks low profitability in 2018.

The low profitability of Nigerian banks was attributed to the federal government in 2017 introducing a new debt strategy designed to refinance some of its maturing domestic debt with external borrowing.

In December 2017, the Debt Management Office(DMO) used proceeds of the $500 million Eurobond offer, issued in November 2017 to repay N198 billion worth of T-Bills which matured during the month.

Also the T-Bills’ issuance calendar for the first quarter of 2018 issued by the Central Bank of Nigeria (CBN), showed a N200 billion difference between the N1.2 trillion worth of T-Bills scheduled to mature during the quarter and the N1.1 million worth of T-Bills to be issued during the quarter, indicating lower borrowing from government.

How much impact will this strategy on Nigerian banks?

According to Fitch Ratings, this strategy by the government may affect 30 percent of banks’ interest income in the 2018 financial year. "The slowdown in T-bill issuance marks a change of strategy as the government looks to increase its financing from external sources and longer-dated domestic issuances," said Fitch Ratings in its statement.

It also went on by saying, "Record T-bill issuance in 2017 helped support the Central Bank of Nigeria’s strategy to maintain naira exchange-rate stability. High yields on T-bills issued in 2017 attracted investors and helped to support the naira."

An increase in oil export earnings and the introduction in April 2017 of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism, commonly referred to as the 'Investors and Exporters' FX Window, also helped naira stabilization during the second half of 2017.

"We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018. The CBN’s latest issuance schedule shows NGN1.1 trillion ($3.6 billion) of rollovers in 1Q18 against N1.3 trillion of maturing bills. In 2017, rollovers fully covered maturing bills. Performance metrics at all banks will be affected by weak demand for lending, falling T-bill yields, lower foreign-currency translation gains, and rising loan impairment charges, but the largest banks are best placed to withstand these challenges."

Nigerian banks are highly reliant on net interest income for profitability and T-bills proved to be an important source of profits in 2017 but bank profitability could drop drastically with this new government strategy.

"Operating returns are still strong at GTB (9M17 operating return on average equity (ROAE): 37%, Zenith 28%; UBA, 22%; and Access, 20%, while FBNH’s operating ROAE is lower at 12% but improving. However, some second-tier banks with a 9M17 operating ROAE of 4%-6% may struggle to remain profitable in 2018."

Fitch Ratings warns Nigeria about the profitability of its banks

On Thursday, January 4, Fitch Ratings warned Nigeria that its banks would struggle to sustain the same level of profitability in 2018 like in 2017 because of the reduction in government borrowing through treasury bills (T-Bills).

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