Nigerian banks hold unknown quantities of legacy exposures – Moody’s

Moody’s Ratings Agency has said that Nigerian banks hold unknown quantities of legacy exposures after the Central Bank of Nigeria’s (CBN) forbearance that was granted during COVID-19. The global ratings agency said this in the note that recapitalisation of the banks will support, but also said that concerns over Nigerian banks’ loan quality persists. Moody’s said in the report “The recapitalisation will enable the banks to better absorb loan losses and increase their lending. They will also be in a better position to implement Basel III international banking regulations”. It added that the plan is overall credit positive for the banking system but it will not fully allay concerns regarding the quality of banks’ loan portfolios. In the note, Moody’s said the top five banks in the sector, which together control over 80% of sector assets, will likely raise the extra capital they require by early next year.
“But the next tier of banks – some of which also have international operating licenses – may struggle to meet the March 2026 deadline”, it added, noting that this will likely spur some sector consolidation. With the recapitalisation, the banks will increase their capacity to absorb nonperforming loans (NPLs), which stood at around 3.9% at the sector level in June. But they still hold unknown quantities of legacy exposures on their balance sheets that were granted regulatory forbearance during the COVID-19 pandemic, Moody’s said in the update While the Central Bank of Nigeria (CBN) has spoken about ending this forbearance, there has been little clarity as to when this will occur, the global ratings agency said. Moody’s said industry-wide nonperforming loans (NPLs) stood at 3.9% in June 2024, down from 4.8% in April 2024 and well below the 5% maximum threshold that the central bank has set as industry standard.
“It is likely, however, that reporting of legacy nonperforming loans is weak, given the forbearance granted to banks and other potentially problematic exposures that were successfully restructured but may not have been classified as nonperforming under the previous CBN leadership.”. Moody’s said over the last 18 months, Nigerian banks have been buffeted by local currency devaluation, rising inflation, and other macroeconomic headwinds. The falling currency caused material capital depletion at the banks. Moody’s said this is because the inflation of foreign currency-denominated risk-weighted assets (RWAs) lifted the denominator of the capital adequacy ratio. It has left some rated banks—FCMB and Fidelity in particular—close to a breach of the 15% minimum capital adequacy ratio, generating concern over their solvency. In response, and in line with earlier interventions in the banking sector, the CBN, under new governor Yemi Cardoso, issued a circular in March, stating that the country’s international banks must increase their minimum regulatory capital by 10x and domestic licensed banks by 8x. The CBN offers several options for compliance: equity capital injection; merger and acquisition; a downgrade of the bank’s licence of authorisation; or a mixture of the three.