Moody's: Nigerian banking system outlook stable

Moody's, the renowned credit rating agency, has released a report indicating that despite the challenges stemming from the difficult operating environment and foreign currency shortages in Nigeria, the Nigerian banking system is expected to remain stable due to its resilient financial performance. Mik Kabeya, Vice President and Senior Analyst at Moody's Investors Service, recently joined CNBC Africa to elaborate on the report and provide insights into Moody's outlook for the banking sector within the West African Economic and Monetary Union. Kabeya discussed the rationale behind the stable outlook, highlighting the importance of resilience in the face of significant market challenges. The report balances the subdued growth forecast of around 3% for 2023 due to dollar scarcity in the economy with the expectation of a robust performance by Nigerian banks. Despite the implications of FX shortages on the operating environment, Moody's anticipates that capitalization will remain high and profitability sound. Kabeya also delved into the impact of FX shortages on liquidity and capitalization. He addressed the risks posed by FX shortages on bank liquidity, particularly through trade finance activities and swaps with the central bank. While acknowledging the uncertainty surrounding the stricter Basel III capital standard, Moody's expects Nigerian banks to maintain solid capitalization levels. The discussion then shifted towards inflation rates and asset risks. Kabeya expressed concerns about modest softening in asset quality, attributed to factors like higher inflation and interest rates affecting borrowers' repayment capacity. However, he noted that Nigerian borrowers, primarily corporate and oil and gas exposed, may withstand these challenges better than counterparts in other African countries. Finally, the conversation touched on the broader picture of the Wemu Bank asset risks, profitability, and funding profile. Moody's maintains a stable outlook for Wemu, citing the benefits of the monetary union and expected resilience of banks. While noting a potential modest softening in profitability due to high interest rates, Kabeya reassured that funding profiles remain stable with some tail risks. Overall, the outlook for the banking sector in both Nigeria and the Wemu region appears positive, underpinned by resilience and stability despite prevailing challenges.