Expiry of Loan Forbearance to Test Nigerian Banks' Capital Buffers

Strategic Insights -

Nigerian banks are facing significant challenges as regulators prepare to withdraw systemwide forbearance measures that have underpinned the sector since the country's last major financial shock. The expiry of loan forbearance by the middle of 2025 will trigger the reclassification of large volumes of risky loans, raising impaired loan ratios and testing banks' ability to maintain adequate capitalisation levels. Despite proactive measures such as loan restructurings and capital-raising, the sector remains vulnerable to the impending risks.

Key Takeaways:

  • The expiry of systemwide forbearance measures by the middle of 2025 will lead to the reclassification of large volumes of risky loans, raising impaired loan ratios and testing banks' ability to maintain adequate capitalisation levels.
  • Fitch estimates that the vast majority of Nigerian banks will exit these arrangements by the end of 2025, with the agency warning that the transition will be disruptive.
  • The reclassification of Stage 2 loans into the impaired category will lead to a significant increase in non-performing loan (NPL) ratios, with knock-on effects for provisioning and capital adequacy.
  • Total capital adequacy ratios (CARs), already stretched for some mid-tier lenders, could come under notable pressure, with banks that fail to meet prudential thresholds facing penalties, including restrictions on dividend payments.
  • Nigerian banks have undertaken proactive loan restructurings to improve repayment profiles, while a wave of capital-raising activity has been set in motion by the Central Bank of Nigeria's (CBN) decision to sharply raise minimum paid-in capital requirements.
  • Improved profitability has provided banks with a cushion against prospective impairment charges, with net interest margins having widened on the back of higher yields.
  • The banking sector's foreign-currency liquidity profile has benefited from the CBN's exchange rate liberalisation and subsequent naira devaluations, with foreign-exchange turnover boosted in the foreign-exchange market.
  • Nigerian banks hold sufficient liquidity to meet external debt maturities in the coming years, with most institutions holding sufficient liquidity to meet Eurobond obligations worth $2.2 billion maturing or callable by 2026.

Statistics:

  • Fitch estimates that the vast majority of Nigerian banks will exit systemwide forbearance arrangements by the end of 2025.
  • Non-performing loan (NPL) ratios are expected to rise materially as Stage 2 exposures migrate into the impaired category.
  • Total capital adequacy ratios (CARs) could come under notable pressure, with banks that fail to meet prudential thresholds facing penalties, including restrictions on dividend payments.
  • Net interest margins have widened on the back of higher yields, enhancing loss-absorption capacity and providing a buffer against prospective impairment charges.
  • Foreign-exchange turnover in the foreign-exchange market has been boosted, with banks' access to hard currency improved.
  • Nigerian banks hold sufficient liquidity to meet external debt maturities in the coming years, with most institutions holding sufficient liquidity to meet Eurobond obligations worth $2.2 billion maturing or callable by 2026.

Sources:

  • Fitch Ratings, "Expiry of Loan Forbearance to Test Nigerian Banks' Capital Buffers"