Revised Guidelines on Credit Assessment for Nigerian Banks

Against the background of a challenging economic and business environment, Nigerian businesses face some key risks in the course of their operations. Specifically, Nigerian banks faced significant margin pressure in 2021 due to reasons such as customer attrition risk, the central bank’s drive to reduce the high cost of its liquidity operations, and the punitive cash reserve ratio (CRR) regime among others.

The Federal Government, by an order dated January 2, 2012, exempted bonds and short-term Government Securities from income tax for a period of 10 years. The exemption expired on 1st January 2022, except for Bonds Issued by the Federal Government, according to FIRS Public Notice.

Taxpayers are therefore expected to comply with the law by including such income in the self-assessment returns and tax computation of companies and paying appropriate taxes.

Such bonds and short-term securities on which tax is due, effective from 2nd January 2022, include: Short-term Federal Government of Nigeria Securities, such as Treasury Bills and Promissory Notes; Bonds Issued by State and Local Governments and their Agencies; Bonds issued by corporate bodies including supra-nationals; Interest earned by holders of the Bond and Securities.

The implication of this is that from this year, banks will start to pay tax on income earned on these instruments and this could affect their net income growth and returns adversely.

In a report by Renaissance Capital, the following were also highlighted as top risks for Nigerian banks in 2022:

Protracted margin pressure on low interest rate

“We believe that margins bottomed in 2021 but struggle to see a significant shift in the interest rate environment going into 2022,” the Renaissance Capital report stated.

The report also noted that although there is room for a rate hike during the year, which may be positive for loan yields, the regulator might opt to take a different stance given the moderation in inflation in the past few months. This was evident in the slight uptick to 15.6 percent in December, from 15.4 percent in November.

Muted trading and revaluation gains

According to the report, the potential lack of volatility in interest and FX rates could hinder the ability of Nigerian banks to book major trading and revaluation gains in 2022.

“In a volatile FX environment, the Nigerian banks’ earnings have been cushioned historically by trading income from interest rate movements and revaluation gains booked on their respective net long positions”, the report stated.

Renaissance Capital also reported that the Naira is 12 percent overvalued and has a fair value of N473/$1; and except there is any negative externalities, there would not be any major depreciation in naira in 2022. This is as a result of strong oil prices and the upcoming elections in 2023, which could see the regulator opt to keep the exchange rate stable.

Heightened political risks

Banks will face heightened political risks as the 2023 elections draw closer.

With the political maneuvering for the 2023 Presidential Election gradually gaining momentum, there is particularly an upsurge in the number of politicians aspiring for the Presidency. Also, there are agitations for power shift from the Northern to Southern region of the country.

Constrained loan growth on Basel III policy

While the Basel III policy creates certain benefits for the banking system, which includes a sturdier capital base, better leverage structures that can help prevent insolvency in times of economic stress, there are some issues worth considering.

“Increasing the capital adequacy requirements for the Nigerian banks could constrain loan growth in a bid to conserve capital. We have forecast 10-15 percent loan growth in 2022”, the report stated.

2022-03-08T11:20:39+01:00

Leave A Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Go to Top