Originally Posted by hispy99
Nigerian Banking Sector, High Risk – S&P
By Moses Obajemu, 08.14.2008
Standard and Poor’s Ratings Services (S&P), a leading international rating agency, has described the Nigerian banking sector as a high risk one in a global context. S&P based its judgement ranking on its Bank Industry Country Risk Assessment.
It said the low ranking on the banking system in Nigeria (foreign currency BB-/stable/B) reflects the high operational and credit risks facing the very young and increasingly competitive bankings sector.
“High operational risks include unstable politics, a weak judiciary, poor corporate governance, internal security problems, and infrastructural deficiencies. These risks are a legacy from the old military dictatorships, which by means of chronic underinvestment and economic mismanagement, have caused poor infrastructure, low wealth, and poor development levels that are currently encumbering Nigeria today”, the report said.
The rating agency said the situation has raised credit risk and restricted financial intermediation for the banks by creating a concentrated economy, low development levels and a large informal work force.
On a positive note, the company said non-performing loans which were once high, are now reducing alongside the positive economy and high write offs.
The report added that since December 2005, mass consolidation of the banking sector, which reduced the sector to 25 banks from 89 banks, transparency, innovation and competirion have all increased.
“Supported by high global oil prices, Nigeria’s current high economic growth and the public and emerging private sector’s financing needs are creating a boom for Nigerian banks. Subsequently, the financial performance of the Tier 1 banks is currently very good, with robust capital levels, good profitability, and strong funding and liquidity profiles”, S&P said.
On credit risk, S&P said low individual wealth levels, an underdeveloped private sector, and a highly liquid public sector have kept financial intermediation levels low in Nigeria. However, it said credit growth has been very high in the past three year, with Tier 1 banks recording high yearly growth of double or even triple figures of their loan portfolios.
Speaking on the report on Nigerian banks at a briefing in Lagos yesterday, officials of S&P said the problem in the Niger Delta, the energy crisis, and infrastructural problems have all combined to affect improved sovereign rating of the country and the banks.
Managing Directorof S&P in South Africa and Sub Saharan Africa, Mr. Konrad Reuss, said the authorities needed to address the Niger Delta problem, which affects oil production as well as giving more momentum to the economic reforms in the country to earn higher rating. A rating analyst with the company, Mathew Pirnie, identified the weaknesses of the Nigerian banking systems as high operational risk due to nascent politics, high credit risk due to low development and competitive and young banking sector.
Pirnie said the current macro economic environment supports banks’ growth and development. Other strengths of the industry, he said. Include significant oil and gas resources, positive banking reforms and good liquidity and capitalisation of Tier1 banks.