Silver lining in Nigeria’s dark cloud
The Nigerian Naira has depreciated by 36% since June 2016. The only silver lining is that the falling naira has generally benefitting banks in Nigeria (NGE). The IMF expects further depreciation in this African (EZA) currency as it views the currency as overvalued to the tune of 10-20%.
A peculiar thing about the financial sector in Nigeria is that about 45% of bank loan books are in foreign currency, leading to an appreciation in value of foreign-currency-denominated assets, each time the naira depreciates. So, for banks with foreign currency assets exceeding foreign currency obligations, a depreciating naira amounts to net valuation gain.
However, there’s a caveat here. For banks, whose foreign currency obligations exceed their foreign currency assets, a depreciating naira may lead to a valuation loss, thus, impacting overall profitability.
Moreover, further depreciation in the naira should require banks in Nigeria to increase provisioning for bad and doubtful debts. “With about 45% of loans and 40% of NPLs in foreign currency, a further depreciation of the naira by 50% would increase NPLs net of provisions to capital by 12% point (from 28% to 40%), ” the IMF report stated.
On an average, banks in this frontier market (FRN) (FM) have returned over 7% during the past year. Top performers for the year so far, at the Nigerian stock exchange are the United Bank of Africa, Access Bank, NPF Microfinance Bank, Zenith Bank, and Guaranty Trust Bank (GUARY) (see table above).