STANDARD and Poor’s (S&P), one of the world’s foremost provider of independent credit ratings recently issued a critical assessment of Nigerian banks that revealed that the banks are still weak and risky.
S&P in its report entitled: “Banking Industry Country Risk Assessment: Nigeria,” rated Nigerian banks as high investment risk. S&P considers that the Nigerian banking sector is (B+/stable/B) and of high risks.
It placed Nigeria’s Banking Industry Risk Assessment (BICRA) in Group 9, similar to banking system in Costa Rica, Lebanon and Belarus.
ACCORDING to John Gibling, Managing Director for Financial Institutions at S&P, “the Nigerian banking system is very high risk. The ratings we have for the banks are in the single B category, it’s a very low level compared to most banks in the world”. He continued, “we continue to see the Nigerian banking system as very high risk, the regulatory reform there is still a long way to go”.
IN his views, what the banks really need is to continue improving their risk management culture, particularly in developing strong asset quality measures and to diversify their portfolio from excessive dependence on short-term funding to more long-term funding that will reduce pressure on the banks and will at the same time enhance economic growth.
THE S&P rating is based on its new risk adjusted capital framework (RACF), developed in anticipation of Basel II implementation. The RACF aims to provide a measure that is independent of national regulations, banks internal risk measurement system, Basel II methodological options, as well as being consistent across banks and geographic regions.
THE S&P Report has expectedly drawn the ire of the apex monetary authority which accused the organisation of bad taste. While S&P is not infallible and could have exaggerated the weight given to some of the indicators used in computing the index used in the Report, nevertheless as a country, Nigeria needs to sift through the report and make changes where necessary.
ANY perceptible Nigerian would know that the banks are no longer what they used to be in the past. Bank lending growth rate has reduced significantly. Bank lending growth fell sharply to six per cent in 2009, following an estimated average of more than 80 per cent in 2007 and 2008. Unemployment among bank officials has risen rapidly in the past one year. Bank workers are uncertain about their future and many of them are passing around their resume for jobs outside the banking industry.
THE problems with the banks arise from internal and external factors. Internal factors are those factors that are internal to the banking industry itself, while external factors are economy-wide in nature and originate from the larger economy. Among the external factors are the overall poor economic climate, poor social and economic infrastructure, high unemployment, low wealth levels, high political risk, poor security situation in some parts of the country and uncertainty over government budgets.
Slower economic growth and declining oil prices continue to hurt the quality of Nigeria’s banks credit portfolio and their profitability. In addition, the reversal in the fortune of shares on the Nigerian Stock Exchange (NSE) has compounded the problems of the banks leading to asset quality deterioration.
AMONG internal factors, S&P identified factors such as poor corporate governance and risk management deficiencies as well as exposure to past internal and external fraud, particularly for those banks rescued by the CBN. Some of the banks also have high exposure rate through loans to the real estate and construction sector in Lagos and Abuja areas where a price bubble is deemed to be highly probable.
WHILE the Report supported some of the proactive actions taken by the CBN Governor, especially in the areas of liquidity support, increased transparency in bank disclosures, and improved risk assessment standard, there is still a long way to go to make Nigerian banks strong again, the recent profits declared for the first quarter by the banks notwithstanding.
Government should continue to demonstrate strong support for the banking industry, help to strengthen corporate governance, be consistent and show clarity in regulatory oversight.
WE, therefore, feel that instead of spending time to contest and dispute the S&P Report, CBN should rather spend more energy to distill lessons for the future and continue to revive its strategies to reposition and rebuild the country’s banking sector.