Nigerian banks: back from the brink

After 10 bailouts, $21bn spent and several mergers, Nigeria’s banks have been given a positive report by Standard and Poor’s.
It’s a tentative thumbs-up though. There is still work to be done, especially in regulation. But it’s a long way from the crisis of 2009.
Back then, eight of the country’s 24 banks had to be rescued after non-performing loans hit over a third of total loans across the banking system. The central bank responded by removing executive management teams from failed banks, guaranteeing the interbank market, and setting up the Asset Management Company of Nigeria to purchase a large proportion of the bad loans. It also set up sizable intervention funds to support credit to the real economy.
It came at a high cost: 3,400bn naira ($21.5bn), several mergers and three closures, as well as two other recapitalisations.
So what’s the good news? The rating agency said in a report on Wednesday that Nigeria’s banks were “again engaging with the domestic economy. Nigeria now has fewer, but larger, banks with better corporate governance and regulatory oversight… As a result of the [central bank's] efforts, the industry and its regulation have improved significantly.”
Analysts agreed – Renaissance Capital coincidentally restarted its coverage of Nigerian banks on Wednesday as well. In a report entitled “A whole new day, again”, it said that “The pressing question on most investors’ minds is, are the loan books clean now? We examine the size of write-offs taken, and conclude that 2011 should have been the peak year.”
But there are remaining concerns. S&P suggests that regulatory oversight and corporate governance are still “key risks”. Merged banks could be more vulnerable to increasing competition; large loans to single companies or industries leave banks exposed to any defaults. The economy is skewed to natural resources, which could suffer in a global slowdown.

RenCap, despite several “buy” recommendations, noted that “loan growth numbers from some players have been gravely disappointing in light of management guidance, and that the expected recovery in returns and profitability in 2011 was woefully unsatisfactory for many of Nigeria’s banks.”

However, this should not undermine what is a remarkable turnaround from 2009. The banks are now over- rather than under-capitalised. International reporting standards should be implemented by the end of the year.
A final word from S&P:

In our view, long-term success for Nigerian banks will chiefly depend on them enhancing their risk management, improving their governance, diversifying their loan portfolio, and securing their funding profile. If the authorities want the financial system, particularly banks, to play a central role in developing the real economy, we expect them to promote the spread of global best practices in the industry.