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Sputtering oil industry halts Nigeria bank loans

Sliding crude prices have slashed earnings from the country's main source of foreign income

Lagos

NIGERIAN lenders are in retreat. Rising costs and declining appetite to lend are prompting banks to repay dollar borrowings.

Brent crude prices near their lowest levels in a year have slashed earnings from Nigeria's main source of foreign income, reducing the amount of foreign exchange banks need to fund deals. At least four of seven Nigerian lenders have either paid up their Eurobonds or are weighing early redemptions as banks struggle to grow loans in an economy battling to gain momentum.

The lenders are also facing uncertainties around what is shaping up to be a close presidential election in February, the ever-lurking risk of a currency devaluation and a surge in soured loans following the 1.6 per cent contraction in the economy in 2016.

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Gross domestic product in Africa's most populated nation rose by 1.8 per cent in the three months through September from a year earlier, less than what economists had predicted.

"The opportunities to deploy dollars and earn risk-adjusted returns have reduced because lending opportunities to the oil and gas sector dried up and pressure on the central bank to defend the naira also waned," said Bunmi Asaolu, a banking analyst at Lagos-based FBNQuest. Lenders will only go back to issuing Eurobonds if there is a "sustained high oil-price environment for maybe two years", he added.

Fidelity Bank Plc, a mid-sized Nigerian lender, issued US$400 million of five-year Eurobonds late last year at 10.75 per cent, at the time the most expensive debt issued by an emerging market before the US started tightening rates. Fidelity was the third Nigerian lender to tap the market in 2018 after United Bank for Africa Plc and Zenith Bank Plc issued US$1 billion of bonds between them.

The pace of loan growth to the oil and gas industry was little changed in the third quarter at about 3.6 trillion naira (S$13.6 billion) from a year ago, according to the statistics agency, even as output rose from a one-year low in the previous quarter. The naira is also trading near an all-time low, adding to the cost of repaying offshore debt.

Although Access Bank sees the currency between 361 and 364 naira per dollar, there might be a 10 per cent devaluation in the long term, managing director Herbert Wigwe said on an investor call in October. The currency has weakened 1.2 per cent this year and closed trading on Monday at 364.77 against the US currency.

Banks that provided loans near, or at the peak, in oil prices "may have to rethink that strategy", said Akinbamidele Akintola, a Lagos-based equity analyst with Stanbic IBTC Stockbrokers.

There has been only a slight improvement in troubled credit. Non-performing loans stood at 12.5 per cent at the end of June, down from 14.8 per cent at the end of 2017, according to the central bank.

"If, for example, a bank raises money at 8 per cent, it has to deploy it at 12 per cent so it can make a margin," Mr Akintola said. "If the bank cannot find any opportunities for the funds it has raised, then there is no point of it sitting on money it doesn't need." BLOOMBERG