COVID-19: Assessing the impact on Nigerian banks

As Nigeria's banking industry responds to the impact of the COVID-19 pandemic, Ayokunle Olubunmi, Head of Financial Institutions Ratings at Augsto & Co, provided an insightful assessment of the current situation in a recent interview with CNBC Africa. Olubunmi highlighted that compared to the 2016 financial crisis, Nigerian banks appear to be better prepared to weather the challenges posed by the ongoing pandemic. The industry has shown resilience with stronger capital reserves and a proactive approach to managing risks amidst the crisis. Despite this preparation, the banks are not immune to the economic repercussions of the pandemic. The foreign currency deficit is a key area to monitor, with banks having some financial flexibility to navigate the volatility in foreign exchange markets. Olubunmi commended the Central Bank of Nigeria's (CBN) efforts in implementing policies and interventions to help mitigate the impact on the banking sector. However, he also raised concerns about certain policies such as the Cash Reserve Ratio (CRR) which have negatively affected the banks' performance. The dynamic regulatory environment poses challenges for banks, especially in terms of asset quality and capital adequacy. The impending recapitalization of Nigeria's banking sector adds another layer of complexity, with some banks facing difficulties in meeting the increased capital requirements. As banks navigate these challenges, core banking activities are expected to see shifts in the short term. Increased competition for loans, reduced margins, and a focus on digital banking amidst the lockdown are some of the trends shaping the industry. Debt issuances by the government could provide opportunities for banks in securities trading but also impact their interest income. The expected increase in impairment charges and non-performing loan ratios will further strain banks' profitability. Overall, the industry is bracing for lower profits and a challenging operating environment. Despite these hurdles, Nigerian banks are poised to adapt and innovate to overcome the obstacles presented by the pandemic and regulatory changes. Olubunmi's insights shed light on the resilience and adaptability of the banking sector as it navigates through uncertain times and prepares for a post-pandemic recovery.