Economy
Devaluation’ll trigger crisis in banking sector
…Banks may write off 50% loans to upstream
…Devaluation will halt bank asset quality
…Capital adequacy ratio declines
…Rising non performing loans
By Omoh Gabriel, Business Editor
Nigerian Banks are projected to suffer more from another devaluation should the CBN concede to pressure to devalue the naira. The banks will suffer asset erosion, reduced income from foreign exchange transaction and loan default from customers. This is the summary of a study conducted by Renaissance Capital on banks operating in the country.
The report said: “We see a three-fold impact on Nigerian banks from a naira devaluation: capital, foreign exchange income and asset quality. It said that three banks’ capital adequacy ratios (CARs) are the most sensitive to a weaker naira given that they do not have sufficient foreign exchange tier 2 capital buffers to shield them from the impact of devaluation. It said that FBNH, Skye, Ecobank Nigeria and FCMB would probably be quickest to breach minimum CAR requirements and feel the pressure to raise capital.
According to Renaissance Capital “GTBank, Fidelity and Stanbic witnessed the most significant jumps in foreign exchange income in the fourth quarter of 2014 and first quarter of last year when the naira was devalued and history could repeat itself. The asset quality impact is more difficult to estimate, but we expect an increase in cost of risk.”
Who blinks first?
The report said: “The outlook appears grim and management teams alluded to this but in our view, the banks are not reflecting this sufficiently in their guidance. Our base case for the sector assumes a margin decline of at least 30 basis point on average; a 70 basis points increase in CoR to 2.4 per cent, a 2 basis points decline in return on equity to 10 per cent and 20 per cent devaluation. We however acknowledge investors’ concerns about the performance of the loan book in the event of another devaluation and a continued decline in oil prices.
“We think the prolonged decline in oil prices leaves the sector facing unprecedented risks, including foreign exchange scarcity, which no bank or the regulator appeared to have factored in as a plausible scenario. The two sectors the banks have aggressively lent to since 2009 are where we think some of the most significant risks lie – oil and gas upstream and services (c. 20% of total loans in 9M15) and power (4% of total loans). We therefore explore a worst-case scenario where the banks write-off 50 per cent of their exposures to upstream, services and power, as well as 10 per cent of the remainder of the loan book.
“This leads to a spike in FY16E CoR to 19% on average; but the banks are not assuming this happens and neither are we today. However, we think that should oil prices continue their steady decline, it could be a matter of who blinks first in provisioning for the extensive loans before the domino effect sets in. Nigerian banks are facing significant asset quality risks that could crystallise in the near term. The trigger of these risks was singular – the sharp and elongated decline in oil prices.
“In our note: Nigerian banks: The nature of growth and risk, published 1 December 2014, we argued that the banking sector was in a different place compared with 2009. While we maintain the view that the sector’s risk management is significantly better than during the previous crisis in 2009, we now think the prolonged and continuous decline in oil prices presents the sector with unprecedented scenarios that risk management systems at both the banks and regulator would have to deal with for the first time on this scale of magnitude.
The risks arise not solely from the impact of low oil prices on the direct lending the banks have made to oil and gas firms, but also from the ancillary impact this has had on economic growth, which has declined to 2-3 per cent from 5-6 per cent historically, and FX liquidity, which has materially affected the CBN’s ability to satisfy demand for FX.
“In our view, the challenge with managing these risks is not only that none of the banks assumed an economic scenario where foreign exchange becomes scarce, but that the longer the difficult conditions persist, we could see banks needing to recapitalise, or see forced mergers, with the regulator stepping in to coordinate the process. “We must say that the banks are today not assuming any of these scenarios could play out, but when we step back to appraise the picture over the past three years, there are fairly obvious signs on the wall that investors should not ignore.
It said: “Regulation is stifling the banks and the recent revision of Basel 2 guidelines, which takes off 2-4ppts on average from the CAR of some banks, is just another capital difficulty the banks have to deal with very quickly after the initial transition to Basel 2 from Basel 1 in 2015; the low interest rate environment does more harm than good for the sector as it significantly reduces the banks’ buffers to take through asset quality stress in a cycle where this is critical; and that the direction of economic management is highly uncertain given the lack of clarity on how the new administration would address a number of critical economic issues.”
Renaissance Capital further said: “Maybe we are too pessimistic but what we have continued to see is the banks living in the hope that oil prices would recover, but that has not played out so far. At sub $30/bl, we think the fundamental performance of the assets the banks are exposed to are questionable even if they are restructured, again. Some of these loans when restructured to $40-45/bl levels, had their repayment tenors extended to as long as seven to eight years.
“The question we ask now is if oil prices do not recover, whether the principals of these companies had such a long-term horizon when these acquisitions were undertaken, or assumed that they could technically be working for the banks for such a prolonged period – we doubt it. The other side of the risk is the challenge the banks could face in repaying the obligations on the eurobonds they issued, as most of the funding was lent to companies in the power and oil and gas sectors.
“These are two sectors on which we stress the impact on CoR and TPs for the banks in our universe if 50 per cent of these loans are written off, along with 10 per cent of the remainder of the loan book. We enumerate the risks the sector faces in 2016 as follows: the looming risk of another round(s) of devaluation, hurting capital and asset quality, margin squeeze from low interest rates, potential non-interest revenue losses from commission on turnover removal, weaker foreign exchange income from trading and trade finance activities, higher impairments arising from a weaker economic backdrop, weaker oil price and currency, and potential fall-back to the banking sector from the new government’s active anti-corruption drive.
“To us, it appears that the banks face significant revenue and asset quality headwinds in an environment of potentially weak credit growth, while not enough is being said today about cost cutting. In light of these risks, we examine the implications of low rates on the margin outlook for the sector, the impact of a weaker naira on capital and NPLs, the impact of revisions to Basel 2 CAR computation guidelines and drivers of the NIR outlook. We also discuss our views on the likelihood of Nigerian banks defaulting on their eurobond obligations.
The Arab Africa Trade Bridges (AATB) Program and the Federal Republic of Nigeria formalized a partnership with the signing of the AATB Membership Agreement, officially welcoming Nigeria as the Program’s newest member country. The signing ceremony took place in Abuja on the sidelines of the 5th AATB Board of Governors Meeting, hosted by the Federal Government of Nigeria.
The Membership Agreement was signed by Eng. Adeeb Y. Al Aama, the CEO of the International Islamic Trade Finance Corporation (ITFC) and AATB Program Secretary General, and H.E. Mr. Wale Edun, Minister of Finance and Coordinating Minister of the Economy, Federal Republic of Nigeria. The Agreement will provide a strategic and operational framework to support Nigeria’s efforts in trade competitiveness, promote export diversification, strengthen priority value chains, and advance capacity-building efforts in line with national development priorities. Areas of collaboration will include trade promotion, agribusiness modernization, SME development, businessmen missions, trade facilitation, logistics efficiency, and digital trade readiness.
The Honourable Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, called for deeper trade collaboration between African and Arab nations, stressing the importance of value-added Agribusiness and industrial partnerships for regional growth. Speaking in Abuja at the Agribusiness Matchmaking Forum ahead of the AATB Board of Governors Meeting, the Minister said the shifting global economy makes it essential for African and Arab nations to rely more on regional cooperation, investment and shared markets.
He highlighted projections showing Arab-Africa trade could grow by more than US$37 billion in the next three years and urged partners to prioritize value addition rather than raw commodity exports. He noted that Nigeria’s growing industrial base and upcoming National Single Window reforms will support efficiency, investment and private-sector expansion.
“This is a moment to turn opportunity into action”, he said. “By working together, we can build stronger value chains, create jobs and support prosperity across our regions”, Edun emphasized. “As African and Arab nations embark on this journey of deeper trade collaboration, the potential for growth and development is vast. With a shared vision and commitment to value-added partnerships, we can unlock new opportunities, drive economic growth, and create a brighter future for our people.”
Speaking during the event, Eng. Adeeb Y. Al Aama, Chief Executive Officer of ITFC and Secretary General of the AATB Program, stated: “We are pleased to welcome Nigeria to be part of the AATB Program. Nigeria stands as one of Africa’s most dynamic and resilient economies in Africa, with a rapidly expanding private sector and strong potential across agribusiness, energy, manufacturing, and digital industries. Through this Membership Agreement, we look forward to collaborating closely with Nigerian institutions to strengthen value chains, expand regional market access, enhance trade finance and investment opportunities, and support the country’s development priorities.”
The signing of this Agreement underscores AATB’s continued engagement with African countries and its evolving portfolio of programs supporting trade and investment. In recent years, AATB has worked on initiatives across agribusiness, textiles, logistics, digital trade, export readiness under the AfCFTA framework, and other regional initiatives such as the Common African Agro-Parks (CAAPs) Programme.
With Nigeria’s accession, the AATB Program extends it’s presence in the region and adds a key partner working toward advancing trade-led development and fostering inclusive economic growth.
Federal Executive Council (FEC) has approved the 2026–2028 Medium-Term Expenditure Framework (MTEF), a key fiscal document that outlines Nigeria’s revenue expectations, macroeconomic assumptions, and spending priorities for the next three years. The approval followed Wednesday’s FEC meeting presided over by President Bola Tinubu at the State House, Abuja. The Minister of Budget and Economic Planning, Senator Atiku Bagudu made this known after the meeting.
The Minister said the Federal Government is projecting a total revenue inflow of N34.33 trillion in 2026, including N4.98 trillion expected from government-owned enterprises. Bagudu said that the projected revenue is N6.55 trillion lower than earlier estimates, adding that federal allocations are expected to drop by about N9.4 trillion, representing a 16% decline compared to the 2025 budget.
He said that statutory transfers are expected to amount to about N3 trillion within the same fiscal year. On macroeconomic assumptions, FEC adopted an oil production benchmark of 2.6 million barrels per day (mbpd) for 2026, although a more conservative 1.8 mbpd will be used for budgeting purposes. An oil price benchmark of $64 per barrel and an exchange rate of N1,512 per dollar were also approved.
Bagudu said the exchange rate assumption reflects projections tied to economic and political developments ahead of the 2027 general elections. He said the exchange rate assumption took into account the fiscal outlook ahead of the 2027 general elections.
The minister said that all the parameters were based on macroeconomic analysis by the Budget Office and other relevant agencies. Bagudu said FEC also reviewed comments from cabinet members before approving the Medium-Term Fiscal Expenditure Ceiling (MFTEC), which sets expenditure limits. Earlier, the Senate approved the external borrowing plan of $21.5 billion presented by President Tinubu for consideration The loans, according to the Senate, were part of the MTEF and Fiscal Strategy Paper (FSP) for the 2025 budget.
The spot rate on Nigerian Treasury bills has been increased by 146 basis points by the Central Bank of Nigeria (CBN) following tight subscription levels at the main auction on Wednesday. The spot rate on Treasury bills with one-year maturity has now surpassed Nigeria’s 16.05% inflation by 145 basis points following a recent decision to keep the policy rate at 27%.
The Apex Bank came to the primary market with N700 billion Treasury bills offer size across standard tenors, including 91-day, 182-day and 364 day maturities. Details from the auction results showed that demand settled slightly above the total offers as investors began to seek higher returns on naira assets despite disinflation.
Total subscription came in at about N775 billion versus N700 billion offers floated at the main auction. The results showed rising appetite for duration as investors parked about 90% of their bids on Nigerian Treasury bills with 364 days maturity. The CBN opened N100 billion worth of 91 days bills for subscription, but the offer received underwhelming bids totalling N44.17 billion.
The CBN allotted N42.80 billion for the short-term instrument at the spot rate of 15.30%, the same as the previous auction. Total demand for 182 days Nigerian Treasury bills settled at N33.38 billion as against N150 billion that the authority pushed out for subscription. The CBN raised N30.36 billion from 182 days bills allotted to investors at the spot rate of 15.50%, the same as the previous auction.
Investors staked N697.29 billion on N450 billion in 364-day Treasury bills that was offered for subscription. The CBN raised N636.46 billion from the longest tenor at the spot rate of 17.50%, up from 16.04% at the previous auction.
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