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Fitch Ratings say Nigerian banks are at severe risk from the drop in oil price due to COVID-19 pandemic

The global rating agency, Fitch, has said that banks in Nigeria face severe risks due to the drop in oil price and the COVID-19 pandemic.

A plaque is pictured at the entrance of the Fitch offices in downtown Milan January 24, 2012.  REUTERS/Alessandro Garofalo

In a release, Fitch explained that the asset quality deterioration of banks has a correlation with high exposures to the oil and gas sector and therefore remains the biggest threat to ratings.

Fitch indicated that the West African country faces a threat of recession as a result of these developments.

In a report on its website, Fitch said “Oil exports represent 95 percent of the country’s export revenue and strongly influence the broader economy. Falling oil revenue may also lead to further currency devaluation. “Accordingly, the slump in oil prices raises the risk of a recession. Operating environment risks are compounded by economic and financial market disruption amid measures to counter the pandemic, putting pressure on all borrowers.”

“Forbearance measures announced by the Central Bank of Nigeria (CBN) will provide some relief to businesses and households and help the flow of credit into the economy. This will support reported asset quality metrics in the short term but asset quality could deteriorate significantly depending on the duration and severity of the oil price shock and Coronavirus turmoil.,” the statement added.

Fitch in recent times downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) from ‘B+’ or ‘B’.

The rating agency also placed all 10 Nigerian banks’ Viability Ratings and IDRs on Rating Watch Negative.

The latest Fitch report stated further, “The resilience of banks’ asset quality, profitability, and capital during the economic downturn will influence, among other considerations, how we resolve the Rating Watches.

“The oil and gas sector represented about 30% of Nigerian banks’ gross loans at end of the third quarter in 2019. Accordingly, loan quality is highly correlated to oil prices, as seen during previous oil price shocks in 2008-2009 and 2015-2016. Impaired loans have decreased since 2017 due to rising oil prices as well as recoveries and write-offs, but the current shock could lead to a significant increase. Any closures of oil fields due to a collapse in global oil demand would exacerbate the impact”.

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