Fitch: Achieving new loan-deposit ratio requirement might be difficult for some Nigerian banks

Nigerian banks are facing a daunting task ahead as they work towards meeting the new loan-to-deposit ratio requirement set by the Central Bank of Nigeria (CBN). Fitch Ratings has expressed concerns about the feasibility of achieving this target, especially considering the current lending levels and the pace at which customer deposits are growing. In a recent interview with CNBC Africa, Mahin Dissanayake, Senior Director for EMEA Financial Institutions Group at Fitch Ratings, shed light on the challenges that Nigerian banks are likely to encounter in meeting the 60% loan-to-deposit ratio by September. Dissanayake pointed out that the largest banks in Nigeria currently have loan-to-deposit ratios slightly below the required 60%, indicating a need for substantial growth in lending within a short timeframe. The operating environment, however, does not seem conducive for such rapid loan expansion, posing a significant challenge for banks. Fitch Ratings highlighted the risk of banks being pressured to lend more, potentially leading to lower underwriting standards and a higher incidence of non-performing loans in the future. The lack of clarity in the central bank's guidance further adds to the uncertainty surrounding the implementation of the new loan-to-deposit ratio requirement. The central bank's decision to conduct monthly checks on banks from September to ensure compliance will intensify the pressure on banks to meet the set target. The CBN also aims to boost lending to consumer and SME sectors, which are considered high-risk segments. While supporting lending to these sectors could benefit the economy, it also introduces additional risks for banks, particularly in an environment where new businesses and underbanked individuals are seeking credit. Fitch Ratings' 2019 peer review report on Nigerian banks highlighted the persistent challenge posed by a high level of bad loans, including both non-performing loans and underperforming loans. The sector's problem loan ratio stands at around 25%, significantly higher than that of other emerging markets, limiting banks' profitability and impeding sector recovery. Despite some improvements in operating conditions, such as modest GDP growth and more favorable market conditions, Nigerian banks continue to grapple with the burden of problem loans and structural challenges. While the overall operating environment for banks in Nigeria has shown signs of improvement compared to previous years, the sector still faces hurdles in achieving sustainable growth and stability. In conclusion, Nigerian banks are confronted with a complex set of challenges as they strive to meet the new loan-to-deposit ratio requirement imposed by the CBN. Fitch Ratings' cautionary stance underscores the need for banks to balance growth objectives with prudent risk management practices to navigate the evolving financial landscape in Nigeria.