Nigeria’s nine largest banks now face a possible downgrade by Moody’s Ratings Servive following the persistent foreign exchange liquidity crisis in the country.
The banks under its coverage are Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria, Fidelity Bank, First City Monument Bank Limited, and Sterling Bank Plc.
In a statement, the international rating agency said the review would assess the banks under its coverage for possible downgrade of the long-term deposit ratings, as well as the long-term issuer and senior unsecured debt ratings.
Among others, the review will determine the resilience of the banks’ foreign currency liquidity positions and risk management frameworks amid ongoing foreign currency rationing in Nigeria and tightening funding conditions globally.
Nigeria’s central bank, the major supplier of foreign exchange liquidity in the country’s forex market, has been grappling with forex liquidity shortages that necessitated rationing and aggravated restriction of access to foreign exchange.
Amid a severe forex liquidity crisis, the apex bank has regularly resorted to rapid draw down on foreign reserves leading to a sharp decline in the country’s reserves from $40 billion as of January to about $38 billion as of last Friday, Oct. 14, 2022
Against this backdrop, Moody’s noted that constraints on domestic oil production, capital outflows, and the increased cost of the country’s imported refined petroleum products, coupled with US dollar strengthening, have together weighed on the availability of foreign currency liquidity in the country despite higher oil prices and material discrepancies between official and parallel market exchange rates which have persisted in the country.
Consequently, the rating agency said the review would evaluate the resilience of the banks’ balance sheets to a potential material depreciation in the country’s foreign exchange rate.
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In particular, the review will assess the extent to which the banks’ capitalisation buffers and foreign currency positions mitigate the risk of a potential material weakening in the local currency.
Moody’s said the review for downgrade reflects an increased risk of foreign currency rationing that could compromise the banks’ operational ability to meet their foreign currency obligations, as well as the risk arising from a potential material depreciation in the country’s foreign exchange rate to the banks’ capitalisation and asset quality.
“…we understand that the central bank, which is the main provider of foreign exchange in the country, has consequently scaled down and become increasingly selective with its foreign currency allocations,” the statement reads in part.
The review for downgrade on the long-term ratings of Nigerian banks also captures the risk that a potential material depreciation in the country’s foreign exchange rate could pose to the banks’ capitalisation and asset quality, the global rating firm said.
On average, around 40 percent of loans extended by Moody’s-rated Nigerian banks as of December 2021 were denominated in foreign currencies, predominantly dollars, according to the report released.
Moody’s said some of these borrowers are vulnerable to a further depreciation of the naira because they do not earn foreign-currency income, and a weaker naira would harm their repayment capacity. The banks’ relatively high level of dollarisation also constrains the central bank’s capacity to act as a lender of last resort in case of need.
The statement added that Moody’s rating review will focus on assessing the banks’ operational ability to meet their foreign currency obligations.
It noted further that the rating review will take into account the expected evolution in foreign exchange reserves, as well as the various tools at the banks’ disposal to conduct foreign currency payments amid the reduced availability of US dollars.
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