Nigerian interest rate cut poses added challenges for banks, Fitch warns

© Reuters. Top banks in Nigeria could feel the brunt of this week's rate cut, Fitch Ratings said on Friday© Reuters. Top banks in Nigeria could feel the brunt of this week’s rate cut, Fitch Ratings said on Friday

Investing.com — Nigeria’s struggling bank sector is likely to face added challenges in light of recent tightening measures from the nation’s central bank earlier this week, analysts from Fitch Ratings said on Friday.

On Wednesday, the Central Bank of Nigeria increased its benchmark interest rate to 14%, its highest level in 10 years in an effort to stem mounting inflation, which soared to 16.5% in June, up by nearly 1% on the month. The rising interest rates will likely place added pressure on asset quality for a number of top banks, Fitch said, creating further difficulties for borrowers.

Last month, the Central Bank decided to float its beleaguered currency, the Naira, in a last-ditch effort to crowd out speculators from the market. While the bank defended the currency at a level of 197 versus the U.S. Dollar for upwards of a year, the Naira had traded as high as 370 on the secondary markets.

Since scrapping the currency peg on June 15, the Naira has plunged more than 60% against the Dollar. Nigeria, Africa’s largest economy, is in the midst of its worst recession in two decades. During the first quarter of 2016, Nigerian GDP slid 0.36% on an annual basis amid sharp declines in the price of oil. In the three months since, a number of oil facilities have been shut down due to a wave of attacks by a rogue militant group throughout Southern Nigeria. Oil represents roughly 10% of GDP in Nigeria’s economy.

“With rising rates, excess liquidity in the banking sector is, in our opinion, likely to flow into additional holdings of higher-yielding government debt,” Fitch Ratings said in a statement. “Nevertheless, for the domestic banks government bonds represent low-risk, low capital intensive investments. Lending, particularly in foreign currency, carries higher risks.”

Earlier this month, Fitch downgraded a host of top banks nationwide, citing the volatile operating environment throughout the country. It came weeks after the ratings agency lowered Nigeria’s sovereign rating to a B+ in June. As banks grapple with higher operating costs and lower net interest margins, prominent financial institutions such as United Bank for Africa and Zenith Bank have been forced to layoff hundreds of employees over the last year.

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