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Nigeria: Tier 2 lenders face worse possible year as worries persist over deteriorating assets

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WED, FEBRUARY 27 2019-theG&BJournal- Nigerian mid-sized and small banks, facing different challenges in all fronts, are expected to struggle this year as they lack the capital buffers to take advantage of high yield environment to boost profit.

Tier 2 lenders have been struggling with deteriorating assets quality as they are yet to recover from headwinds brought on by a drop in crude price in mid-2014 even as the country exited recession.

In 2018, Central Bank of Nigeria (CBN) revoked the licence of Skybank, transferred its assets and liabilities to new abridged bank, Polaris.

Stress tests by the central bank showed that only the largest banks would withstand a 50 percent increase in non-performing loans.

However, NPLs of the banking industry fell by 2.50 percent to 11.70 percent in the fourth quarter of 2018 from 14.20 percent in the second third quarter of 2018.

Third quarter 2018 financial statement of Unity Banks shows the lender is technically insolvent as total liabilities of N496.46 billion exceeded N254.30 billion total assets, resulting in a negative shareholders fund of N242.30 billion.

Unity Bank has been recording recurring losses as evidenced in accumulated losses of N338.10 billion, as it is trying to recapitalize its operations after selling its loan book.

While juicy yield on short term government securities are expected to undermine profit of larger banks, the smaller firms may miss out in the low hanging fruit of buying government debts because they are grappling with rising NPLs and they haven’t built enough capital buffers.

Yields on one year treasury bills are currently at 17.10 percent, albeit lower than the 22.0 percent for 2017.

Analysts expect CBN to offer more Open Market Operations (OMO) to lenders as it continues to mop up excess liquidity while curtailing inflation.

Inflation for the month of January stood at 11.37 percent, lower than the 11.47 percent for December.

Credit growth is expected to remain subdued as the economy remains underperforming, and trading income might be lower than what the banks recorded in 2018,”a banking analyst at Exotix Partners LLP in Lagos, Olabisi Ayodeji said.

Analyst at United Capital Ltd however expect yield environment to retrace in the second quarter of 2019 in the event of a successful and smooth transition, and this may hurt bottom lines.

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