Fitch Rankings has warned that Nigerian banks face rising dangers because of their heavy publicity to authorities debt and burdensome regulatory insurance policies of the Central Bank of Nigeria (CBN).
The company estimates that sovereign-related property comprising treasury payments, bonds, and unremunerated reserves account for 35% of whole banking sector property and 350% of whole fairness.
Fitch famous that this degree of publicity creates a cloth focus danger that would severely influence {bank} solvency within the occasion of a sovereign default.
Talking throughout a latest webinar co-hosted by Fitch and Renaissance Capital, Tim Slater, Director for African Banks at Fitch Rankings, mentioned the sector continues to face regulatory hurdles, most notably the Money Reserve Ratio (CRR), which requires banks to deposit 50% of their naira deposits with the CBN with out incomes any curiosity.
The money reserves positioned on the Central {Bank} are unremunerated and subsequently constrain the banking sector’s profitability,” Slater said.
He revealed that as of December 2024, unremunerated money held on the Central {Bank} accounted for a considerable 17% of whole banking sector property, up from 12% in 2016 and represented 46% of naira deposits, in comparison with 27% in 2016.
This, he mentioned, considerably limits banks’ means to increase credit score or generate returns on property.
Nevertheless, whereas the official CRR was raised from 32.5% to 50%, Slater famous that the precise burden on banks was beforehand extra extreme because of advert hoc debits imposed beneath the previous CBN management.
“The earlier management tended to drive banks to put money on the Central {Bank} on an advert hoc foundation each time it perceived excessive strain on the change charge,” he defined. “This usually resulted in precise money reserve ranges far exceeding the official requirement.”
In response to Slater, this apply has modified beneath the present CBN management. The precise CRR now aligns extra carefully with the official requirement, bringing better consistency and predictability.
“So, though the official requirement has elevated considerably, the amount of money positioned on the Central {Bank} has not,” he mentioned. “This better transparency in how the requirement is utilized helps banks plan higher and handle their tight liquidity extra successfully.”
The CRR requirement is actually essentially the most important, however different rules and coverage actions by the authorities have additionally negatively impacted the banking sector’s {financial} profile.
Firstly, banks are actually topic to a minimal loan-to-deposit ratio (LDR) of fifty%, which incentivizes extra aggressive lending than many establishments would in any other case undertake based mostly on their very own danger urge for food.
Whereas the coverage is designed to stimulate credit score to the actual sector, it might expose banks to better credit score danger and contribute to a build-up in non-performing loans (NPLs) over time, particularly if lending shouldn’t be matched by enhancements in borrower high quality or sectoral resilience.
Secondly, the Central {Bank} has prohibited banks from sustaining internet lengthy international foreign money positions on an unconsolidated foundation since early final 12 months. This forces banks to promote extra international foreign money into the market, thereby supporting the naira, however on the expense of lowering their means to profit from FX revaluation beneficial properties in periods of depreciation.
In consequence, banks will now not profit from FX revaluation beneficial properties within the occasion of an additional naira devaluation, which reduces their means to hedge towards international change danger.
Lastly, the authorities have imposed a windfall tax on sure FX beneficial properties booked by banks following the devaluation, additional eroding profitability and limiting the sector’s capability to soak up currency-related shocks.
In Fitch’s view, these insurance policies, although aimed toward making certain macroeconomic stability and supporting the naira, are squeezing {bank} profitability and limiting operational flexibility.
The warning comes because the Central Bank of Nigeria (CBN) just lately directed banks to droop dividend funds if they continue to be beneath regulatory forbearance, significantly for loans to the oil and fuel sector that haven’t but been absolutely restructured.
Fitch emphasised that many of those exposures are giant and dollar-denominated, leading to breaches of the Single Obligor Restrict (SOL) and posing important dangers to capital adequacy ratios.
“Obligor restrict breaches are a serious obstacle to banks exiting forbearance,” Slater defined, including that with out an extension of forbearance, many such loans could be reclassified as impaired, triggering substantial provisioning necessities.
Whereas the directive raised considerations out there, the vast majority of affected banks have responded by assuring stakeholders of their dedication to regulatory compliance, plans to exit forbearance, and intentions to take care of dividend funds.
For instance, FirstHoldCo Plc has reaffirmed its dedication to adjust to the CBN’s prudential pointers, together with addressing breaches of the Single Obligor Restrict and exiting forbearance on its credit score exposures.
In an announcement issued on Thursday, June 19, 2025, the HoldCo defined that the SOL breach by its banking subsidiary, FirstBank, includes two international foreign money mortgage exposures considerably impacted by the over 200% Naira devaluation between 2023 and 2024.
Concerning the forbearance services, FirstHoldCo clarified that the affected loans are a part of syndicated trade exposures, and that the consortium of lenders concerned is at present working to restructure and re-tenor the services in keeping with improved asset efficiency and money move outlook.
The {bank} additionally assured shareholders of its intention to proceed with dividend funds in 2025 and past, topic to regulatory approval and compliance.
Slater additionally made a rapid however vital level on the sovereign constraint affecting Fitch’s {bank} rankings.
As beforehand famous, the Nigerian banking sector holds a considerable quantity of sovereign property, with Fitch estimating these exposures, comprising authorities mounted revenue securities and CBN reserves, at 35% of whole home banking sector property and 350% of whole fairness as of December 2024.
As beforehand famous, the Nigerian banking sector holds a considerable quantity of sovereign property, with Fitch estimating these exposures, comprising authorities mounted revenue securities and CBN reserves, at 35% of whole home banking sector property and 350% of whole fairness as of December 2024.
Fitch defined that this degree of publicity poses a cloth focus danger, making banks’ solvency extremely delicate to any losses imposed on sovereign collectors within the occasion of a hypothetical sovereign default.
