1. Excesses that have been built up in the banks in recent years is likely to negatively impact their financial performance for years to come.

2. The economic crisis has taken its toll on the banks but the consolidation exercise of 2005/2006 places them in a better position to absorb ongoing risks.

3. Fitch believes the recent trend of slower credit growth is a positive development.

4. Rapid earnings growth since 2005 masked the increasing levels of risk in the system. Higher impairment charges are expected as the economy slows.

5. Fitch expects that Nigerian banks will need to manage their costs and overhead structures more closely going forward

6. The sector is characterised by weak efficiency ratios which have resulted from an underdeveloped economic infrastructure and because many banks lack operational scale.

You can read download the report below:

 Fitch Ratings Of Nigerian Banks (895)

Here is the press release from Nasdaq:

Fitch Ratings-Johannesburg/London-10 June 2009: Fitch Ratings says in a report published today that the excesses which have been built up in Nigerian banks in recent years is likely to negatively impact the financial performance of the sector for the next couple of years. In addition, the economic effects of the global credit crisis have also taken their toll, but the sector is relatively well positioned to absorb ongoing risks because of significantly higher minimum capital requirements that followed the system-wide consolidation in 2005 and 2006.

Fitch notes that 2008 marked the end of a period of rapid expansion for the Nigerian banking sector as the global credit crisis and lower oil prices caused a rapid decline in the operating environment. However, the system-wide consolidation of 2005/2006 should place the sector in a better position to absorb the risks that arise from slower growth and deteriorating asset quality indicators. Fitch believes that the recent trend of slower credit growth is a positive development for the sector.

“Despite the challenging operating environment, Nigerian banks continued to report strong earnings growth in 2008 on the back of rapid credit and deposit growth and Fitch expects earnings growth will continue in 2009, albeit at a slower pace,” says Anthony Walker, a Senior Director in Fitch’s Financial Institutions group. However it remains to be seen as to how Nigerian banks will address their share lending exposures in their financial statements. The agency considers that significant impairment charges could arise if these exposures become non-performing or if the value of collateral continues to remain below minimum coverage ratios”.

Fitch believes that the trend of rapid earnings growth since 2005 has masked the increasing levels of risk in the system, and higher impairment charges are expected as Nigeria’s economy slows. The rapid credit growth, which was the fastest of any country covered by Fitch during 2007 and 2008, lead to Fitch’s Macro Prudential Indicator (MPI) increasing to ’3′ from ’2′ in May 2009, to the highest risk category. The MPI aims to identify the potential for systemic stress.

Lending in various forms backed by shares has emerged as an important risk consideration following the significant deterioration in Nigerian share prices since early 2008. The Central Bank of Nigeria (CBN) estimates that the sector- wide exposure was between NGN800bn and NGN1,200bn as of end-2008, although estimates in the sector vary depending on the definitions utilised. However, for Fitch-rated banks, the exposures provided by management appear lower compared with the CBN’s estimates. At end-2008, the CBN allowed banks to reschedule these exposures, to prevent their classification as non-performing. The Fitch report shows that no agency-rated bank is expected to breach its minimum regulatory capital requirements, based on the agency’s calculations in a capital- sensitivity test for Fitch-rated banks and assuming a 50% provision for estimated exposures.

Given the present operating environment, Fitch expects that Nigerian banks will need to manage their costs and overhead structures more closely going forward. The sector is characterised by weak efficiency ratios which have resulted from an underdeveloped economic infrastructure and because many banks lack operational scale. This could lead to further market-driven consolidation during 2009 and 2010, as tightening liquidity, deteriorating asset quality and anticipated difficulties in raising new capital see certain banks being acquired by stronger institutions.

The report, entitled ‘Nigerian Banking Sector: Annual Review and Outlook’, contains an overview of the country’s banking sector and recent developments, and is available on the agency’s subscription website, www.fitchresearch.com, under Financial Institutions/Banks/Special Reports.

They also prepared reports on the banking and insurance sectors earlier in the year. You can also read those here:
Afrinvest 2008 Nigerian Banking Sector Report (453)
Afrinvest 2008 Nigerian Insurance Sector Report (381)
Some of the main points in their non-financial sector reports are:
Historically, the industial corporations used to be the main stay of the Nigerian economy.
Factors for the reduced emphasis of the non-financial secotr:

1. The emergence of banks on the public equities scene and the rapid growth in thier earnings and valuations has made the banks the dominant factors in the NSE.
2. The Nigerian economy has become more transactional rather than productive.
3. The financial services sector has been quicker to the see the benefits of the macroeconomic policies of the government.
4. Industrial corporations have not been active in issuing new shares creating a general lack of trading liquidity in their stocks relative to banks.

Reasons for the slow growth of the non-financial services sector:

1. The crippling effect of the epileptic power system resulting in increased costs of doing business.
2. The global food crisis.
3. Higher interest rates.

Opportunities:

1. Relative political stability
2. Increased consumerism

The companies covered are:

1. Building and Construction Sector:
2. Ashaka Cement Plc
3. Benue Cement Company Plc
4. Cement Company of Northern Nigeria Plc
5. Lafarge Cement Wapco Plc
6. Julius Berger Plc

Consumer Goods Sector:

1. 7-UP Bottling Company Plc
2. Dangote Sugar Refinery Plc
3. Flour Mills of Nigeria Plc
4. Guinness Nigeria Plc
5. Nestle Nigeria Plc
6. Nigeria Bottling Company Plc
7. Nigerian Breweries Plc
8. P Z Cussons Nigeria Plc
9. U A C of Nigeria Plc
10. Unilever Nigeria Plc

Healthcare Sector:

1. Glaxo Smithkline Plc
2. May & Baker Plc
3. Nigerian-German Chemicals Plc

Chemical and Paints Sector:

1. Berger Paints Plc
2. CAP Plc

Petroleum Marketing Sector:

1. African Petroleum Plc
2. Chevron Oil Plc4
3. Conoil Plc
4. Mobil Oil Nigeria Plc
5. Oando Plc
6. Total Nigeria Plc

Others:

1. Japaul Oil & Maritime Services Plc
2. R T Briscoe (Nigeria) Plc
3. Starcomms Plc
4. Vitafoam Plc

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