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The ongoing Russia-Ukraine conflict will have no major negative impact on the overall operations and assets quality of Nigerian banks.
In a review, S & P Global Ratings said given the minimal exposure of Nigerian banks to Russia and Ukraine, the conflict will have no major impact on the asset quality, cost of risk or profitability of the banks.
In the review entitled: “How the Russia Ukraine conflict could affect Middle East and African banks”, S & P Global Ratings noted that financing exposures of rated banks in Nigeria are largely concentrated in Africa, United Kingdom and Asia and thus stand no contagious risks from the conflict.
According to the report, while the evolving nature of the conflict implies considerable uncertainties, assessment of the lending and operations of banks showed no significant direct impact.
The report was positive for the Middle East and Africa (MEA) banking system, noting that like Nigerian banks, South African banks also have limited possibility of any major direct impact from the conflict. The report pointed out that whereas some South African corporates have exposure to Russia, rated South African banks’ loan exposures are well diversified and thus such exposures are not expected to indirectly affect South African banks’ financial profiles.
“Overall, we forecast a limited direct impact on rated MEA banks’ cost of risk from the Russia-Ukraine conflict, if the situation does not worsen,” S & P Global Ratings stated.
Our reporter check showed that Nigerian banking industry has shown resilience, despite the global adverse effect of the COVID-19. Latest audited reports and accounts of banks have shown a steady overall outlook, with growth in assets and profitability in most cases.
The audited results of United Bank for Africa (UBA) Plc for the year ended December 31, 2021 showed appreciable growths across key financial metrics. Gross earnings rose to N660.2 billion in 2021, representing an increase of seven per cent on N616.8 billion recorded in 2020. Profit before tax rose by 20.3 per cent to N153.1 billion in 2021, compared with N127.3 billion in 2020. Profit after tax grew by 8.7 per cent to N118.7 billion in 2021 as against N109.2 billion recorded in the previous year. Total assets rose by 11 per cent to an unprecedented N8.5 trillion last year, up from N7.7 trillion in 2020, thus marking the first time the bank’s assets will cross the N8 trillion mark. Similarly, net loans grew by 7.7 per cent to N2.8 trillion while customer deposits rose by 12.2 per cent to N6.4 trillion in 2021 compared with N5.7 trillion in 2020.
Another tier 1 bank, Access Bank Plc reported that gross earnings rose by 27 per cent from N764.7 billion in 2020 to N971.9 billion in 2021. Profit before tax grew by 40 per cent N176.7 billion last year as against N125.9 billion in 2020. After taxes, net profit leapt by 51 per cent from N106 billion to N160.2 billion. Total assets rose by 35 per cent from N8.7 trillion in 2020 to N11.7 trillion in 2021. Customer deposits also rose from N5.6 trillion to N7 trillion. Net loans and advances increased from N3.6 trillion to N4.4 trillion. The credit risk management of the bank remained increasingly efficient with the ratio of non-performing loans to gross loans and advances dropping from 4.3 per cent in 2020 to four per cent last year.
The S & P Global Ratings’report however noted that wider economic effects related to the Russia-Ukraine conflict have potential to negatively impact MEA banks, especially if the crisis worsens.
“In our view, the economy is one of two main channels for current events to potentially hit MEA banks, alongside refinancing. The conflict has triggered a significant increase in energy, transport, and food prices because of higher commodities prices, including oil and gas,” S & P Global Ratings stated.
The leading global rating agency however noted that the impact of the crisis on MEA countries and banks depends on their resilience to external shocks, especially in economic diversification and wealth levels.
While the increase in commodities prices is positive for well-structured and financially strong oil and gas exporting countries, the effect is likely to be negative for commodities or oil and gas importing countries with higher imports and current account deficits, additional external financing requirements, increased government spending in the form of rising subsidies where they exist, higher inflation, and reduced repayment capacity of retail and corporate clients if price rises are fully passed on.
The report stated that the conflict could also hit tourism sectors in some countries at a time when they are recovering from the COVID-19 pandemic, especially those that depend on Russian or Ukrainian visitors, such as the United Arab Emirates (UAE), Turkey, Egypt, and Tunisia.
In refinancing risks, the report pointed out that the Russia-Ukraine conflict could result in a significant increase in risk aversion from investors. “Any further adverse developments could affect investors’ appetite and trigger some outflows,” S & P Global Ratings stated.
But within the MEA bloc, countries such as Qatar, Turkey, and Tunisia would be the most vulnerable to refinancing risks. Other MEA countries like Nigeria and South Africa looked at either have a net external asset position or manageable net external debt. Even with the risks, the report estimated that the vulnerable national banking systems have sufficient capacities to ameliorate the risks.
The Qatari banking system’s external debt has continued to increase over the past five years, reaching 39.2 per cent of total assets at year-end 2021. Although banks in Qatar enhanced the quality of their external debts with longer maturities and stronger relationships with external depositors over the past few years, the current situation is fluid. However, Qatari banks continue to hold a relatively good cushion of external assets that can be used in case of outflows and there is strong government capacity and a track record of support in case of need.
S & P Global Ratings had stress-tested the actual external debt position of the Qatari banking system under different assumptions and the results showed that it should be able to absorb a moderate shock without recourse to the government.
Similarly, Turkish banks’ external debt has declined moderately over the past five years but remains a significant source of risk.
According to the report, although Turkish banks have sufficient external assets to withstand moderate stress, whether they can access these assets under extreme stress remains uncertain, since most are placed with the central bank or held in government instruments.
For Tunisia, the report noted that the issue was at the sovereign level and related to the government striking a deal with the International Monetary Fund (IMF) to finance its 2022 deficit. Given Tunisian banks’ increasing exposure to the sovereign, any additional pressure at the sovereign level would likely hit their creditworthiness, according to the global rating agency.
The report noted that while it was unclear if the conflict would increase use of cryptocurrencies as populations look at alternatives they could perceive as instruments to protect their savings and wealth in MEA, it is noteworthy that five of the top 30 countries for crypto adoption are in MEA. Based on per cent of population that adopted cryptocurrencies, Nigeria ranks eighth on the global scale.
“At this stage, there is no indication of local funding outflows in MEA but the risk cannot be totally excluded if the conflict escalates. Some regulators may also restrict the use of cryptocurrencies to avoid potential adverse effects on their financial systems,” the report stated.