Nigerian banks have sufficient capital and liquidity buffers to withstand prevailing macroeconomic challenges, providing headroom at their current rating levels, Fitch Ratings has revealed in a new report.

The rating agency said operating conditions for banks will weaken in 2023 due to high inflation, rising interest rates and US dollar shortages, in addition to continued regulatory intervention and the potential for disruption caused by the general election in February.

“We expect impaired loans ratios to increase moderately as borrowers contend with the challenging macro conditions. The restructuring of Ghana's sovereign debt will add to asset-quality pressure at Nigeria's largest five banking groups”.

Fitch expects stronger revenues, resulting from higher interest rates and revaluation gains that will accompany a Nigerian naira devaluation, to counteract greater impairment charges and non-interest expenses, resulting in a modest improvement in profitability in 2023.

It added that the Central Bank of Nigeria's (CBN) highly burdensome cash reserve requirement will remain a significant constraint on profitability.

The naira remains under pressure, raising the possibility of a material devaluation in 2023.

Fitch believes banks' capital ratios will be fairly resilient to such a devaluation due to their net long foreign currency (FC) positions and small FC-denominated risk-weighted assets, while tighter FC lending standards in recent years will help to contain asset-quality pressures.

The benefits of high oil prices for Nigeria's external reserves have been eroded by persistent production issues and the increased cost of the oil price subsidy. Fitch expects US dollar shortages to continue but for banks' FC liquidity buffers to remain sufficient, particularly considering limited external debt maturities in 2023.

Nevertheless, Nigerian banks' ratings are sensitive to a negative sovereign rating action due to their high sovereign exposure.

This, coupled with the concentration of operations within Nigeria, constrains their Viability Ratings at the level of the sovereign ‘B-’ rating.