Credit analysts are of the opinion that higher interest rates will boost net interest margins for most Nigerian banks in 2023. However, worse-than-anticipated headwinds would dampen credit demand, pressurise SMEs that are still healing from the impact of the pandemic, and push highly leveraged consumers to the edge of default.
Rising interest rates in line with a loan growth rate above the GDP growth rate will improve banks’ revenue generation, profitability and mitigate moderate rises in credit costs.
Analysts also believe that Nigeria’s sovereign debt distress is a major risk to domestic banks’ financial profile and that further sovereign downgrades would result in more bank rating downgrades in 2023. They say that the contemplation by the FGN and CBN of securitising the Ways and Means Advances in 2023 may introduce some volatility, uncertainties, and headwinds in the financial markets.
Asset quality risk is likely to be more prominent in Nigeria and Africa compared to other parts of the world, with the rate at which individuals and corporates are being hit by high inflation and rising rates.
For decades, high inflation has been one of the major issues in many countries, and the macro picture has in fact shifted dramatically in 2022. The main challenge for central banks in most countries has been to improve their economies by keeping inflation under control.
Political and economic risks are on the rise with a continued Russia-Ukraine war and the forthcoming election in Nigeria in 2023. The general election and associated post- events may intensify credit risk for banks, requiring banks to keep higher loan loss provisions as a result of a possible increase in Non-Performing Loans (NPLs). With the increasing rate of political activities, credit risk to economic players will increase, potentially leading to higher market uncertainty and volatility.