12 October 2016, Abuja – The Central Bank of Nigeria, CBN, has expressed concerns over the banks’ exposure to the oil and gas sector, stating that the huge exposure was capable of triggering systemic risks in the financial sector.
CBN, in its June 2016 Financial Stability Report, stated that the huge exposure of banks to the oil and gas sector coupled with the low price of crude oil in the international market continued to generate concerns especially regarding the capacity of the obligors to meet their obligations.
According to the CBN, at end-June 2016, loans to the oil and gas sector constituted 28.77 per cent of the gross loan portfolio of the banking system as credit to the sector grew to N4.5 trillion, compared to N3.31 trillion at end-December 2015.
This, the CBN explained, was in comparison to the manufacturing sector, which accounted for 12.95 per cent of the total credit, compared to 13.91 per cent in the second half of 2015, while agriculture, forestry and fishery accounted for 3.08 per cent of the total, indicating a 0.69 percentage point decline compared to 3.77 per cent in the preceding half year.
Consequently, CBN stated: “Given the persistent weakness and volatility in the price of crude oil, the CBN will continue to closely monitor the exposure of banks to the oil and gas sector and take appropriate actions to curtail systemic risks in the industry.
“To proactively address these concerns, a review of the exposure of banks to the sector was conducted and appropriate actions implemented. Following the review and in line with the provisions of the Prudential Guidelines of July 2010, a sizable number of the facilities were downgraded and re-classified as non-performing with additional provisions effected.
“The bank enhanced the supervision of the exposure of banks to the oil and gas sector and the foreign exchange market. Cross-border supervisory collaborations were also sustained.”
CBN noted that total exposure to the top 50 obligors stood at N5.23 trillion, representing 33.4 per cent of total industry credit exposure of N15.68 trillion”.
It projected that credit risk was expected to trend higher into the second half of 2016 owing to increased loan impairments resulting from the depreciation of the Naira, inability of obligors to service foreign currency-denominated loans, as well as bank exposures to the oil and gas sector.
It said, “In the second half of 2016, foreign currency liquidity is expected to remain a challenge owing to low prices in global commodity markets and declining oil revenues.
In addition, the recent downgrade of Nigeria to BB- from B+ is likely to increase borrowing costs.”
Continuing, however, the CBN said, “On the domestic front, the current efforts of the government are expected to minimize the impact of the slowdown in the economy. The expected gradual recovery of oil prices in the international market, as well as increased productivity in the domestic economy, arising from the diversification efforts, should boost output growth”.