One of the top credit rating agencies, Moody’s Investors Service, announced that it has put on review for downgrade the long-term deposit ratings, as well as long-term issuer and senior unsecured debt ratings, where a potential impact of the nation’s lingering foreign exchange crisis on Deposit Money Banks’ (DMBs) operational ability to meet their foreign currency obligations as well as their capitalization and asset quality.
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, FCMB Limited, and Sterling Bank Plc are the banks. The agency said in a statement:
Constraints on domestic oil production, capital outflows, and the increased cost of the country’s imported refined petroleum products, coupled with US dollar strengthening, have together weighed on the availability of foreign currency liquidity in the country despite higher oil prices and material discrepancies between official and parallel market exchange rates persist in the country.
Nigeria’s foreign exchange reserves have declined to $38 billion as of September 2022 from $40 billion as of January 2022 despite higher oil prices, and we understand that the central bank, which is the main provider of foreign exchange in the country, has consequently scaled down and become increasingly selective with its foreign currency allocations.”
The examination for a reduction on the long-term ratings of Nigerian banks also takes into account the risk that a potential major depreciation in the country’s foreign exchange rate could pose to the banks’ capitalization and asset quality, it continued. As of December 2021, loans made by Nigerian banks with Moody’s ratings were typically denominated in about 40% of foreign currencies, primarily dollars.
Because they do not get revenue in foreign currencies, some of these borrowers are particularly exposed to additional naira devaluation, which would hurt their ability to make repayments. The central bank’s ability to serve as a lender of last resort in times of crisis is also hampered by the banks’ comparatively high level of dollarization.
The rating review will consider the expected evolution of foreign exchange reserves as well as the various tools at the banks’ disposal to conduct foreign currency payments amid decreased availability of US dollars, the agency explained. It will assess the banks’ operational ability to meet their foreign currency obligations.