Don’t Panic, Nigerian Governor Assures Amid Looming Bank Shake-Out – Reuters

By Chijioke Ohuocha and Ulf Laessing

LAGOS – Nigeria’s Central Bank Governor, Godwin Emefiele, is urging calm in light of the ongoing banking crisis affecting the country’s economy. He stated that he is actively addressing any issues within the financial sector, which is currently facing its most severe challenges in decades.

So far, depositors and investors have shown trust in Emefiele’s leadership, particularly following his intervention with mid-tier lender Skye Bank earlier this month. He provided a loan and replaced its management after the bank’s capital fell below regulatory requirements.

However, the situation is precarious. Many banks are struggling with loan portfolios impacted by a contracting economy, a depreciating currency, and significant foreign exchange shortages due to declining oil prices—the primary economic driver for Nigeria.

Analysts forecast that non-performing loans could rise to 12.5 percent of total loans this year, significantly above the central bank’s target of 5 percent recorded at the end of the previous year. This surge reflects the aftermath of a credit boom in the oil sector that abruptly halted in 2015.

Across the nation, banks are laying off employees, reducing branch networks, and cutting profit forecasts, with concerns that some may not survive the ongoing turmoil. Bismarck Rewane, CEO of Financial Derivatives, noted that the decline in profitability is likely to lead to consolidation in the sector.

Failure of the banking system could have devastating effects on the nation’s citizens, as government employee salaries are processed through banks and many residents rely on electronic payments for basic transactions.

Abubakar Suleiman, CEO of Sterling Bank, indicated that a mere 20 percent drop in the naira could lead to a wave of mergers among banks. Following a devaluation last month, the currency has depreciated by more than double that figure against the dollar.

Currently, approximately 42 percent of the loans extended by Nigerian banks are denominated in dollars. A significant further decline in the naira could compel some banks to raise additional capital in order to meet stability requirements.

Concerns over banks’ capital adequacy are rising, particularly as the naira continues to weaken. Analysts from Exotix have highlighted that banks such as UBA, Diamond Bank, and Guaranty Trust Bank have a significant proportion of dollar loans—around 50 percent each.

While UBA and GTB assert they do not require recapitalization at this time, some medium-sized banks may face the need to bolster their capital. The central bank has stated it is monitoring a couple of institutions for liquidity concerns, although specifics remain undisclosed.

Adding to the uncertainty, Guaranty Trust Bank recently postponed the release of its half-year results pending an interim audit, while other banks like Skye and Stanbic have yet to disclose their first-quarter earnings. Moreover, several banks have incurred heavy dollar-denominated debts, which are now more costly to service.

As a reflection of the bleak outlook, investors have been offloading banking stocks over the past year, resulting in the banking index reaching its lowest point since inception in 2009. Many stocks remain underperforming, having not recovered from the downturn experienced following the global financial crisis in 2009.

With the IMF projecting a 1.8 percent economic contraction for Nigeria this year, immediate conditions for the banking sector look dire. Nonetheless, Emefiele stressed the resilience of the financial system, urging the public not to panic. He reassured depositors that their funds are secure and implored them to continue their daily transactions without worry.

However, his reassurances come on the heels of a recent surge in deposit withdrawals from Skye Bank, and concerns among the public are heightened by police investigations into several banks for alleged illegal activities. The lack of transparency regarding insider loans—often unreported in a timely manner—has also been flagged as a significant issue.

The Nigeria Deposit Insurance Corporation has expressed worry about the growing trend of non-performing insider loans and its potential ramifications for the overall stability of the banking system.