Oil Collapse Poses Great Risk To Nigerian Banks

Bank earnings are gradually responding to dwindling oil prices and a second wave of threat to naira devaluation, which are the bigger risks arising from the COVID-19 pandemic.

Banks like Fidelity Bank PLC posted N22.48 billion fall in profit against what was realised in Q1 2020, which were N5.9 billion in the Q1 of 2020 and N28.425 billion in Q1 2019.

Most  Nigerian banks  have their crude risks pegged at $40-$50 a barrel, according to ARM Investment Managers in Lagos, implying that additional provisions would need to be raised if crude prices maintain the low trends.

“The risk to earnings is higher if oil prices are less than $30 per barrel over a prolonged period of time – up to six months in our opinion,” Aderonke Akinsola, an analyst at Chapel Hill Dunham in Lagos, had said.

He added that,  “We cannot rule out the possibility that some banks may not survive that.”

A further adjustment of the naira following the March adjustment could make dollar loans to hike and the effect would have to be naira earnings, while putting the cost of the capital into consideration.

Meanwhile CBN is counting on the sector showing sign of distress to restructure loans.

Recall that the decline in oil prices of 2014 which caused the devaluation of the naira in 2016 and subsequent recession led to increase in nonperforming loans.

The impact added to the collapse of Skye Bank Plc and Diamond Bank Plc, which was bought by Access Bank Plc in 2019,  while Blomberg says 2020 oil fallout may be worse.

The CBN is trying to enforce the 65% Loan to Deposit Ratio (LDR), a percentage that is assigned for credits.

Just last week CBN debited N1.47 trillion ($3.8 billion) from the cash reserves of banks for failing to meet the new failing to met the new 27.5% Cash Reserve Ratio.

However banks  like Guaranty Trust Bank Plc, who have most of their capital denominated in dollars or other foreign currencies may win from a naira devaluation.