Nigeria just put its banking sector on alert
The Central Bank of Nigeria announced earlier this week that it's replacing the management of the country's eighth biggest lender by assets, Skye Bank, after it failed to meet the minimum capital ratios, according to Bloomberg's Emele Onu, Renee Bonorchis, and Paul Wallace.
The CEO, the chairman, and 10 directors on the bank's board resigned on Monday.
The central bank added that Skye Bank's non-performing loan ratio has been above the regulatory limit for some time now, according to Reuters' Chijioke Ohuocha and Oludare Mayowa.
Speaking to reporters on Monday, the central bank's governor, Godwin Emefiele, asserted that Skye Bank "is not in distress and remains a healthy bank in the system." And on Thursday, the central bank said that all its banks are safe, and that "there is, therefore, no need for panic withdrawals from any bank," according to Bloomberg's Wallace.
However, these comments haven't been enough to alleviate worries about the rest of the country's banking system.
Over the last few months, Nigeria has been badly bruised by various economic shocks such as lower oil prices, dollar shortages, and production outages caused by militant groups in the Niger Delta.
Data from the Nigerian Bureau of Statistics released in late May revealed that the country's economy shrank way more than expected in the first quarter - by 0.4% year-over-year. Analysts promptly warned these numbers suggested that the country is headed for a "full-blown economic crisis."
Banks in particular have been feeling the pain from the oil sector slump, given that the sector gives about 26% of its loans to oil and gas companies, according to December 2015 data cited by Anubi.
Notably, in this environment, Anubi argued that non-performing loans are "likely to continue the upward trend on weak growth." Here's what he wrote in his note to clients (emphasis ours):
"In the course of 2016, it is likely that a significant part of the rise in NPLs will be due to problem loans in the oil sector. Some banks have been proactive in this arena. In December 2015, Moody's claimed that 20% of oil and gas loans had already been restructured with maturity extensions and we expect that these activities have continued this year. However, there is a possibility that the downturn in the oil and gas sector (and in the overall economy) seen so far this year is worse than the banks anticipated, implying that there could be more pain ahead.
The operating environment in Nigeria is difficult. In S&P's most recent review of the sector the rating outlook was revised to negative for six banks, mainly due to low oil prices, weak growth, FX shortages, higher cost of risk, liquidity pressures and falling asset quality. They expect NPLs to rise to 6.0% in 2016 from 5.5% in 2015, above the prudential CBN ceiling of 5.0%. Data from Q16 results of the largest banks shows average NPLs of 7.0%. History shows that lower oil prices tend to lead to higher NPLs. However, this time, the recovery in oil prices will to some extent be offset by lower oil production."
The central bank had deemed Skye Bank as "systemically important," but, as Anubi points out, " this bank is only 4% of total industry assets. Nigeria's larger banks look better capitalized."
Plus, according to local press reports cited by Anubi, most of Nigeria's larger banks have stronger CAR ratios than Skye Bank. The latter's is reportedly below the 15% minimum requirement, while other lage banks are, on average, at 19.9%.
In any case, Nigeria's banking system might be something to keep an eye on.
