Impact of Nigeria's power woes on banks

Nigeria's power sector has been in the spotlight recently, with Senate President Bukola Saraki revealing that proceeds from the sector's privatization totaling $4 billion have been used for salaries and pensions by the Bureau of Public Enterprises. This revelation has raised concerns about the lingering challenges facing the sector and the implications for banks operating in Nigeria. Muyiwa Oni, a banking analyst at Stanbic IBTC, shed light on the sector's impact on banks during a recent CNBC Africa interview. The meeting held with major players in the power sector, including lawmakers and the Minister of Power, highlighted the misallocation of privatization proceeds. While the use of funds for sector liabilities was deemed understandable, the lack of transparency surrounding the utilization of proceeds raised questions. The primary focus, according to Oni, should be on revitalizing the sector and driving efficiency. On the banks' front, the exposure to the power sector amounts to approximately 5% of total loans in the banking sector, roughly around 800 billion naira. However, the classification of non-performing loans (NPLs) related to the power sector remains minimal as of now. Banks like Zenith and Fidelity have acknowledged power sector loans in their NPLs, but the overall impact on their loan portfolios is still manageable. Despite the challenges faced by the sector, most loans are currently performing well. The uncertain cash flows from struggling power sector businesses pose a risk to banks, prompting a cautious approach towards further exposure. The recent calls for a new tariff system and government intervention highlight the sector's need for regulatory support. While politicians are actively engaging in finding solutions, banks may need to prepare for potential provisions on power sector loans to mitigate risks. In terms of investment prospects, banks are unlikely to ramp up support for the sector without significant reforms. Private equity firms and other financial institutions may step in, but investor confidence hinges on comprehensive sector reforms and tariff adjustments. The future outlook for the power sector's investment landscape depends on regulatory clarity and sustainable operational practices. Overall, the challenges facing Nigeria's power sector have raised concerns for banks, requiring a balanced approach to managing exposure and mitigating risks. Collaborative efforts between stakeholders and regulatory bodies will be crucial in charting a sustainable path forward for the sector and ensuring a stable financial environment for banks operating in Nigeria.