Economy

Don’t Panic, Says Nigerian Central Bank Governor as Bank Shake-Out Looms

By Chijioke Ohuocha and Ulf Laessing

LAGOS – Breaking the longstanding silence among central bankers regarding potential crises, Nigeria’s Governor of the Central Bank, Godwin Emefiele, is advising the public not to panic about the banking system. He asserts that he is managing the challenges stemming from the most significant economic downturn in decades for Africa’s largest economy.

Currently, depositors and investors appear to be providing Emefiele with some leeway following his intervention to stabilize mid-tier lender Skye Bank with a loan and a management restructure after it fell below required capital levels.

However, mounting pressures are evident, with approximately half of the banks’ loans being denominated in dollars. These loans are under strain due to an contracting economy, a declining currency, and severe foreign exchange shortages—issues linked to the decline in oil prices affecting Nigeria as a leading crude producer.

Non-performing loans are projected to rise to 12.5 percent of total loans this year, significantly higher than the central bank’s target of 5 percent at the close of the previous year. This increase is largely attributed to the aftermath of a credit boom in the oil sector that ended abruptly in 2015, according to Nigeria’s primary rating agency.

The nation’s 21 banks have begun layoffs, closed branches, and cut earnings forecasts, with analysts suggesting that not all will weather the current storm.

"It will affect their profitability initially and eventually it will impact their liquidity and solvency," noted Bismarck Rewane, CEO of the Lagos-based consultancy Financial Derivatives. "The pressure on profitability could lead to natural consolidation and a shakeout."

A decline in the banking sector could have far-reaching effects in Nigeria, a nation of 170 million, where civil servants receive their wages through banks and many rural residents rely on electronic systems for routine payments.

Abubakar Suleiman, chief executive of Sterling Bank, indicated that a 20 percent drop in the naira could initiate a "wave" of mergers among banks. Since a recent devaluation, the currency has depreciated by even more than that against the dollar.

Overall, around 42 percent of loans from Nigerian banks are dollar-denominated. If the naira continues to weaken, some banks may need to recapitalize to maintain financial stability.

"There is concern regarding banks’ capital adequacy as the naira depreciates," stated Razia Khan, Chief Economist for Africa at Standard Chartered. "As the naira weakens, foreign exchange loans could become problematic."

According to analysts, some banks—particularly UBA, Diamond, and Guaranty Trust Bank (GTB)—have the highest proportions of dollar loans, at 50 percent each. While Diamond declined to comment, UBA and GTB are confident they do not require recapitalization due to the currency’s decline.

A Lagos-based banking analyst, speaking anonymously, suggested that three or four medium-sized banks may need to raise capital. The central bank is monitoring one or two banks for liquidity issues but has not specified which ones.

Compounding these uncertainties, GTB has postponed the release of its half-year earnings pending an interim audit. Two mid-tier banks, Skye and Stanbic, have also yet to publish their first-quarter earnings.

Additionally, some banks have taken on significant dollar-denominated debt, which has become costlier to service. GTB leads this list with $1.6 billion in such debt, trailed by First Bank of Nigeria with $915 million.

Anticipating difficulties due to a weaker naira, investors have been offloading banking stocks for the past year, driving the banking index to its lowest point since its establishment in 2009—less than half its value from mid-2014.

Many banking stocks, once favored by foreign investors during an economic boom, continue to lag following a significant sector meltdown in 2009 triggered by the global financial crisis. Shares of Zenith Bank are currently at a third of their pre-crisis highs, Access Bank at a quarter, and First Bank at just 10 percent. In contrast, GTB has recovered well, boasting one of the lowest rates of non-performing loans and share prices consistent with their 2008 levels.

With the International Monetary Fund forecasting a 1.8 percent contraction for Nigeria’s economy this year, the outlook for the banking sector appears bleak. Nonetheless, Emefiele remains confident in the integrity of the financial system.

"The strategic health of the Nigerian banking system remains strong at this time. There is no need for anyone to panic or worry about any bank being in distress," he stated following a recent monetary policy meeting. He urged depositors to remain patient, assuring them that their funds are secure.

However, his reassurances came after a rush by depositors to withdraw funds from Skye Bank earlier this month. Concerns are heightened due to police investigations into some banks over alleged illegal transactions.

"The moment you start saying it, it raises eyebrows—why are you saying that?" remarked Financial Derivatives’ Rewane.

Another challenge lies in the transparency regarding "insider loans" to bank directors and shareholders, which often go undeclared in earnings reports, potentially exacerbating the existing challenges.

The Nigeria Deposit Insurance Corporation expressed its concern this week regarding the rising tide of non-performing insider loans across various banks and their implications for the stability of the nation’s banking system.

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