Nigerian banks appear to be navigating current challenges better than anticipated, according to Tolu Alamutu, Analyst at Exotix Partners.

“Further asset quality deterioration is likely, but many of the problems have already been identified. There are risks to consider such as the weakness of some small banks, delays in implementing the long- anticipated economic recovery plan and headlines related to the President’s health. However, the mood in Lagos was far more upbeat than it was a year ago,” he said.

The view from banks suggests more exchange rate flexibility will be welcomed. 

Most lenders have stressed capital ratios and other metrics to much weaker NGN levels. At some banks, such stress tests resulted in higher capital ratios (given those banks’ long FX positions).

Alamutu said that the banks’ NPL ratios may rise this year, but he is not expecting the magnitude of changes reported in early 2016. 

“Restructured loans, particularly in the oil and gas sector, are still a concern for us even though banks state that those loans were restructured at oil prices lower than is the case today,” he said.

The lenders have kept capital ratios above the regulatory minimum, despite significant pressures on asset quality and increases in RWAs driven by currency weakness. 

This has (at least in part) been offset by FX revaluation gains. 

“However, while profits in 9M 16 were stronger than in the previous year (at most major lenders) and could improve this year, banks are generally not guiding to higher capital ratios, given uncertainties about the exchange rate. All the banks we met expect total capital ratios to remain above15%,” said Alamutu.

He added that there may be more supply from a handful of banks this year. 

“This is despite the CBN circular stating that new issues from banks will need to be subordinated. While GT Bank seems less likely to replace its 2018 bond (based on current yields), other lenders are monitoring current conditions and did not rule out returning to/entering the Eurobond market,” he said.

Alamutu said that the CBN appears willing to provide liquidity support to banks. 

In addition, there could be programmes which help improve asset quality, similar to the contractor bond programme supported by the authorities in the past. 

“Discussions on this are continuing, so it is not yet clear what the impact on individual banks will be. However, we expect the size of such a facility to be significant. At banks with foreign parents, such as Ecobank Nigeria and Stanbic IBTC, the probability of support from the owners – through capital injections, asset transfers or other means – remains high,” he said.

“We expect Ecobank Nigeria to continue to benefit from parental support. On Zenith Bank, solid FY16 results should be positive for the bond. Lastly, on Access Bank, our meeting with management suggests asset quality deterioration should be manageable,” he added.