Fitch Ratings has cautioned that the Central Bank of Nigeria’s (CBN) new regulations could impede the banking sector’s ability to support Nigeria’s economic recovery. This warning came as Fitch revised the Outlook on the Long-Term Issuer Default Ratings (IDRs) of five Nigerian banks and one bank holding company to Positive from Stable, while affirming their Long-term IDRs at ‘B-’.
In its latest ratings issued yesterday, Fitch highlighted a $2.2 billion foreign exchange backlog that the CBN Governor, Dr. Olayemi Cardoso, stated could not be verified and would therefore remain unpaid. The agency noted that the CBN’s efforts to reform the monetary and exchange rate framework carry risks, including the possibility of introducing regulations that could destabilize the banking sector, amid renewed volatility in the forex market.
The banks affected by Fitch’s outlook revision include Access Bank Plc, Zenith Bank Plc, United Bank for Africa Plc (UBA), Guaranty Trust Bank Limited (GTB), Guaranty Trust Holding Company Plc (GTCO), and Bank of Industry Limited (BOI).
Fitch’s revision reflects its view that Nigeria’s Long-Term IDRs are becoming less of a constraint on these banks’ standalone creditworthiness. The outlook change for BOI indicates an expected improvement in the government’s capacity to support the policy bank. This follows the revision of Nigeria’s sovereign outlook to Positive on May 3, 2024, which was influenced by recent government reforms aimed at restoring macroeconomic stability and enhancing policy coherence and credibility.
These reforms include adjustments to exchange rate and monetary policy frameworks, reductions in fuel subsidies, improved coordination between the Ministry of Finance and the CBN, reduced central bank financing of the government, and measures to increase government revenue and oil production efficiency.
The National Ratings of the affected issuers remain unchanged. BOI’s Government Support Rating (GSR) is affirmed at ‘b-’, with the GSRs of other issuers unaffected.
Fitch noted that the Long-Term IDRs of Access Bank, Zenith Bank, UBA, GTB, and GTCO are driven by their standalone creditworthiness, as reflected by their Viability Ratings (VR) of ‘b-’. These ratings are constrained by Nigeria’s Long-Term IDRs due to high sovereign exposure through fixed-income securities, cash reserves, and FX swaps with the CBN. The VRs also account for the banks’ strong business profiles, significant market shares, revenue diversification, robust profitability, and large capital and foreign-currency liquidity buffers. The Positive Outlooks on these banks’ Long-Term IDRs mirror the sovereign outlook.
However, despite the sovereign outlook revision, Fitch noted that operating conditions remain challenging. The recent naira devaluation by over 65% against the US dollar since May 2023 has pressured the banking sector’s capitalization and heightened credit concentration risks. Inflation, which stood at 33.2% in March, is expected to remain high in the near term, projected at 26.3% for 2024, partly due to exchange rate pass-through and rising food prices.
Fitch anticipates that the banking sector’s resilience to these risks will be bolstered by a marked increase in equity issuance over the next two years, aimed at meeting the significant rise in paid-in capital requirements by the end of the first quarter of 2026.
