Nigeria Banks More Exposed Than Russia’s to Oil Slump

By Paul Wallace and Emele Onu  

First Bank, Nigeria’s largest lender, and Guaranty Trust Bank Plc are among banks with the most at stake as tumbling oil prices strain the economy of Africa’s biggest crude producer.
Oil companies account for 25 percent of bank lending in Nigeria, Olalekan Olabode, an analyst at Lagos-based Vetiva Capital Management Ltd., said in e-mailed comments on Dec. 12. That’s even higher than in Russia, the biggest oil producer. Among the three largest Russian banks, OAO Sberbank relies on the industry for 2.2 percent of loans, VTB Bank OJSC 8.1 percent and Gazprombank OJSC 16 percent, company filings show.
“The outlook for Nigerian banks is very linked to what happens to oil prices,” said Adesoji Solanke, a banking analyst in Lagos at Renaissance Capital Ltd. “Oil prices have significant economic implications for Nigeria, which eventually feed through to the banks.”
Nigeria, Africa’s biggest economy, derives almost all export earnings and 70 percent of government revenue from oil. The price of Brent crude has dropped more than
40 percent this year to the lowest since May 2009, prompting Finance Minister Ngozi Okonjo-Iweala to propose an 8 percent budget cut on Dec. 17. The central bank raised interest rates to a record last month to protect the naira.
The Nigerian Stock Exchange Banking Index has dropped 30 percent this quarter, reflecting investor concerns that petroleum companies may struggle to pay debt. Non-performing loans will climb to between 5 percent and 10 percent by the end of 2015 from less than 3 percent now, Fitch Ratings Ltd. said in a note yesterday.

Index Slump

The country’s lenders form sub-Saharan Africa’s biggest banking industry after South Africa, with about $155 billion of assets, according to Exotix Partners LLP. Banks with the greatest reliance on the energy industry at the end of September were FBN Holdings Plc (FBNH), owner of First Bank, Guaranty, the biggest lender by market value, and Skye Bank Plc, said Olabode at Vetiva Capital.
While oil producers’ earnings could be eroded by reduced income from sales of crude, the depreciation of the naira, which has fallen 11 percent against the dollar this quarter, also makes it more expensive for fuel suppliers to pay for gasoline imports. Nigeria only has refining capacity to meet 30 percent of demand.
“The sliding oil price poses a threat to banks’ performance as asset quality deteriorates amid a tougher operating environment,” Olabode said.

‘Key Area’

The proportion of lending to petroleum companies has more than doubled from 11 percent since 2008, Renaissance Capital said in a Dec. 1 note. Lenders including Zenith Bank Plc have pushed into the industry to take advantage of oil-field sales by foreign companies to Nigerian participants such as Seplat Petroleum Development Co. Shares in Seplat have plummeted 56 percent since their April debut in London and Lagos.
“The country’s banks had viewed oil and gas exploration and production as a key growth area,” Kapilan Theiventhirampillai, an analyst at Bloomberg Intelligence in London, said by phone.
Lenders are already confronted by higher capital adequacy standards imposed by the Central Bank of Nigeria. An increase in the cash reserve requirement for private sector deposits to 20 percent from 15 percent last month, designed by policy makers to bolster the currency, cut lenders’ ability to boost earnings by expanding loans.
“They’re probably going to suffer from all sides – loan growth, revenue growth and NPLs,” said Theiventhirampillai. “They’ve been the worst performers this year compared to their peers in the Middle East and Africa. They’ve been smashed.”

Avoiding Crash

Nigeria’s banking index has declined 34 percent since the end of 2013. South Africa’s banks have risen by a weighted average of 19 percent, while Abu Dhabi’s lenders have climbed 11 percent, according to data compiled by Bloomberg.
Even so the banks will probably avoid revisiting the events of the 2008 and 2009 oil crash, when the state intervened to rescue some lenders, according to Solanke at Renaissance Capital. Bankers have improved risk management since then, he said.
“For us to see a repeat of 2009, the oil sector really has to blow up,” he said.
First Bank has structured its oil loans, which form 40 percent of its portfolio, so that they can be serviced “at prices well below current market rates,” said Chief Risk Officer Abiodun Odubola. Guaranty’s lending to the oil industry has dropped from 28 percent to 22 percent since the end of September, spokesman Lashe Osoba said. Skye, which has almost a third of its loans with petroleum companies, doesn’t expect defaults to increase at current prices, said spokesman Rasheed Bolarinwa.