Banks May Delay Foreign Loans Repayment – Moody’s

The Central Bank of Nigeria and Nigerian banks may delay payment of foreign currency loans due to scarce dollar resources, Moody’s Investors Service has said.

Rated local lenders have placed about $10.4bnn with the central bank in the form of derivative transactions including swaps and forwards, Moody’s analysts including Mik Kabeya and Lynn Merhi, said in a report on Thursday.

According to the analysts,  there is a risk the apex bank may temporarily prolong repayment of these loans beyond their maturity date because of a shortage of foreign currency.

They said, “There is a risk that the central bank may decide to temporarily prolong those contracts beyond their original maturity date.”

According to the report, the CBN’s dollar obligations is about one-third of the country’s foreign-exchange reserves of $37bn as of January. It stated that the apex bank has had to ration dollar supply to the economy to reduce pressure on the reserves which declined from $40bn in December after the country failed to take advantage of higher oil prices to boost output.

Moody stated that many lenders, conscious of the effect a payment delay may have on their operations, had reduced the duration of the derivative contracts and the size of the amounts placed with the central bank by cutting the tenor of such contracts to 12 months from 24 months.

It said, “A material delay in repayment could lead to the banks facing their own foreign-currency shortages and could constrain their ability to repay their own foreign currency liabilities.”

It further stated that the central bank has a strong record of repaying its obligations. It added, “Most Nigerian banks have a successful track record of recalling these foreign-currency assets placed with the central bank.”

Recently, Moody downgraded nine Nigerian banks. It downgraded to Caa1 from B3 the long-term deposit ratings, issuer ratings, as well as the senior unsecured debt ratings (where applicable), of all the nine lenders.

The downgraded banks included Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria Plc, Fidelity Bank Plc, First City Monument Bank Limited, and Sterling Bank Plc.

It said, “Rated Nigerian banks have significant direct and indirect exposure to the Nigerian sovereign, with a significant portion of their assets located in the country, and sovereign debt holdings representing 28 per cent of their aggregate total assets as of June 2022.

“Government exposure links the banks’ credit profiles with the sovereign’s, whose rating was downgraded on 27 January 27, 2023, to reflect Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate.”