Moody’s: Nigeria’s ultra-low T-Bills yields will harm banks profitability

Moody's Investors Service has raised concerns over Nigeria's ultra-low treasury bills yields and the impact they are having on the profitability of banks in the country. According to Peter Mushangwe, Banking Analyst at Moody’s, these low yields, coupled with a high inflation rate, are credit negative for the banks as they will compress net interest income. This means that banks will struggle to reduce their cost of funding at an equal pace, putting a strain on their profitability. Reflecting on 2020, the banks in Nigeria faced challenges due to the COVID-19 pandemic, leading to a deterioration in profitability. Interest income declined by 1.4% in September 2020 compared to the previous year, while costs remained high due to increased provisions. Despite this, the banks maintained strong capital adequacy ratios and liquidity buffers above the minimum requirements. However, concerns remain regarding macroeconomic conditions, asset quality, and lower net interest margins. The low treasury bills yields and reduced lending rates have led to a decline in net interest margins for banks, with limited room to reduce costs further. Mid-size banks are expected to be more heavily impacted compared to larger banks. Looking ahead to 2021, Moody's predicts continued pressure on banks' profitability due to the persisting low returns on assets and elevated provisions. With GDP growth forecasted at 2.1%, slow economic growth will continue to challenge asset quality, potentially leading to an increase in non-performing loans. Moody's expects non-performing loans to rise from 5-6% to around 10%, primarily due to foreign currency shortages affecting foreign currency borrowers and the lingering effects of the pandemic on borrowers' ability to repay. Overall, the outlook for Nigerian banks remains challenging as they navigate a tough operating environment characterized by low yields, reduced margins, and a fragile economic landscape.