Nigerian Banks Face Asset Quality Crisis – Report

Nigerian banks are once again susceptible to an asset quality and solvency crisis as a result of the emergence of COVID-19 and subsequent deterioration in economic activity which includes a drop in oil price and potential decline in export volumes.

This is the third time in ten years and according to the report by EFG Hermes, a leading Africa’s securities brokerage company, the banking sector had gone through two previous crises identified as margin loan crises between full year 2009 to 2012 and the oil price crash between 2014 and 2019.

The report is  titled, “One crisis too many; downgrading”.

During the 2009 and 2012 margin loan crisis, the reversal in asset prices following the global financial crisis precipitated significant deterioration in the credit quality of the margin loan books of banks.

Notably, margin loans had been a key driver of system loan growth between 2004 and 2008.

The sector wide NPL ratio spiked from 6.3 per cent in 2008 to 27.6 per cent, which subsequently led to 10 of the 24 banks being classified as “grave condition banks” due to high NPL ratios and/or insufficient capital.

In order to resolve the crisis, the Central Bank of Nigeria set up a special purpose vehicle (Asset Management Company of Nigeria, AMCON) to absorb NPLs and recapitalise the sector.

By the end of 2012, AMCON had absorbed up to N4.020 billion worth of NPLs and injected up to N2.774 billion of capital into the sector.

Subsequently, four of the grave condition banks were acquired by local peers, three of them were absorbed by AMCON and the last three banks managed to re-capitalize and survive on their own.

During the 2014 and 2019 oil price crash, the increase in the banks’ exposure to upstream oil and gas combined with a crash in oil prices, resulted in a spike in the system’s NPL ratio to 14.0 per cent in 2016 from 2.3 per cent in FY14.