Fitch Ratings and Nigerian banks ….. SUN

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Fitch Ratings, a renowned international credit agency, warned in a recent report that Nigerian banks may be heading into financial and operational storms. It based its opinion on what it described as the increasing difficult conditions under which the banks are operating. The conditions identified by the agency include the banks’ current high exposure to the domestic market and Nigeria’s sluggish economy. The report, signed by the agency’s Director, Financial Institutions, Mr. Mahin Dissanayake, noted that the country’s banking sector outlook had been in negative territory since December last year. Beyond that, it disclosed that Nigeria’s Gross Domestic Product (GDP) figures for the Second Quarter (2Q15) of this year showed weaker year-on-year growth of 24 percent. It went down four percent from the previous quarter. This is said to be the slowest quarterly growth rate for over a decade.

The agency also took stock of the slump in oil sector growth in 2Q15 and non-oil growth to arrive at its warning. Its statistics show that oil sector growth slowed significantly in 2Q15, while the non-oil sector declined from 5.6 percent to 3.5 percent in the First Quarter of this year (1Q15).
Part of this slowdown was said to have been caused by temporary fuel shortages that caused industrial and manufacturing output to contract, while falling oil prices remarkably reduced government spending and availability of foreign exchange. These reportedly had a negative impact on capital planning and adequacy, as well as the profitability of the banks.
The warning by Fitch is not tantamount to the pressing of a panic button on the health of Nigerian banks. It should not raise unnecessary fears about the liquidity, solvency, stability or profitability of the institutions.
Rather, the warning should be seen as a wake-up call. Our economic planners, the banks and relevant regulatory authorities should carefully study the report and the indices uses by Fitch to arrive at its position.
It will be inexpedient for Nigeria to disregard this report. That will amount to living in denial. We say this in view of the latest report from the National Bureau of Statistics (NBS) which paints a gloomy picture of Nigeria’s Second Quarter (2Q15) economic situation. It affirms that “the prevailing economic uncertainty in the country reduced the amount of capital importation into the economy from US$2.67159bn in 2Q14 to US$2.66636bn in 2Q15”.
In agreement with Fitch, the NBS report also noted that Nigeria’s GDP expanded by only 2.35 percent annually, compared with 3.96 percent a quarter earlier-the slowest growth in over a decade.
The way forward for the banks is to work on the negative indicators, to guard against financial stormy weather. It has also become necessary for the Federal Government to initiate a sound economic blueprint that will strengthen the fundamentals of the economy and restore confidence in the banking industry. Capital is a fundamental and vital part of the commercial banking industry. It enables the banks to steer away from stormy waters. Therefore, capital adequacy is necessary if the banks are to weather the storm of hard operating conditions and ensure profitability, which is the primary concern of investors.
It appears to us that the concerns expressed in the Fitch report are real, even if somewhat exaggerated. This is in view of the current economic situation of the country. The disturbing trends require a comprehensive check on the health of the banks, at least to ensure that they are solvent, liquid and capable of withstanding financial and operational headwinds.
Considering the important role of banks as financial intermediaries in the economy, warnings such as the one from Fitch should not be ignored.  They should be taken seriously. Before the Fitch warning, another credit rating agency, Standard & Poor’s, had warned that our economy was in danger.
We, therefore, advise the nation’s economic planners and the banks to work on the factors identified by the agencies to be hampering their growth and that of the general economy. These include weak institutions and flip-flop economic policies that do not stand the test of time.
The banks should always bear in mind that proper management of their credit risks is key to their survival. Long-range planning for improved future performance is also crucial as well as avoidance of problems that put pressure on their Cash Reserve Ratios (CRRs) and profitability.
Overall, warnings by credit rating agencies should be seen as offering opportunity to address critical elements that could affect the health of our banks. If we want to strengthen and ensure the sustainable growth of these banks and the economy, we must dispassionately consider their ratings and take steps that are in the best interest of Nigeria. We should not sweep them under the carpet.