Nigerian banks to face risks despite oil price rally

Nigerian banks are facing potential risks despite a recent surge in crude oil prices, according to a report by Fitch. The report highlights that the operating environment for Nigerian banks could deteriorate due to adverse global economic conditions. Femi Oladehin, a Partner at Argentil Capital Partners, joined CNBC Africa to discuss the challenges and opportunities facing the Nigerian banking sector amidst the oil price rally. While the increase in oil prices has been beneficial in terms of higher pricing, Nigeria has experienced a drop in supply volumes, impacting the maximization of income and leading to higher import prices. This has resulted in significant benefits on the foreign exchange side for the banks. However, the transition from a dovish to a hawkish monetary policy, with rising interest rates and concerns about inflation, poses significant risks to the banks. Despite these challenges, the report projects a neutral outlook on the Nigerian banking sector. Oladehin notes that the sector has witnessed substantial earnings growth over the past decade, following the 2015-2016 slowdown during the first recession. This has better equipped the banks to handle potential deterioration in lending capabilities or loan performance. While acknowledging the resilience of Nigerian banks to past stagflation episodes, Oladehin highlights the current global interconnectedness that presents external risks to the market. He emphasizes the need for robust economic growth to sustain credit expansion, amid concerns about high inflation rates. The report suggests recommendations such as banks returning earnings and disposing of assets to meet regulatory requirements in the challenging environment. Oladehin recommends a cautious approach to portfolio management, favoring tier one banks like FBN, UBA, GTBank, Zenith, and Access Bank due to their higher returns on assets and robust balance sheets. Smaller banks heavily exposed to sectors like oil and gas and manufacturing may face greater challenges in a weaker economy. International banks like Stanbic are seen as potential holds for their strong risk management capabilities. Ultimately, Oladehin maintains a neutral stance on the industry as a whole, highlighting the need for careful consideration and strategic investment decisions in navigating the current economic landscape.