Nigeria: Rising inflation could hurt credit growth, warns DataPro

The positive credit momentum seen at the start of the year could be interrupted by inflationary pressures around the world, DataPro, the rating agency, warned.

While credit dynamics reflected favorable funding conditions and a strong economic recovery from the strains imposed by Covid-19 restrictions, “this could be derailed if persistently high inflation prompts central banks to aggressively tighten monetary policy, triggering significant market volatility and revaluation risks,” DataPro warned in its assessment of Nigeria’s credit outlook in 2022.

“Persistent inflation, linked to supply chain disruptions and soaring energy prices, could trigger wage inflation and push the CBN to raise interest rates sooner and faster,” noted the rating agency, noting that this could generate market volatility, likely amplified by high debt levels. .

It comes as GTCO Holdings Plc (formerly Guaranty Trust Bank Plc) noted that low fixed income rates would force local banks to seek credit expansion opportunities during the year.

“The relatively low yield of fixed income securities (FIS) will increase the pressure on banks to intensify credit creations to the private sector, which in turn will increase competition for quality loans between banks and lead to a slight increase Funding pressure could also trigger a complementary revaluation of online deposits in line with current market realities,” GTCO said in its Macroeconomic Overview of the Nigerian Economy for 2022.

GTCO noted that banks will continue to seek innovative ways to increase non-interest income as well as consumer and personal lending. “Given an expected increase in government borrowing due to a higher budget deficit and lower revenues, a low interest rate regime may not hold much longer,” he said.

For its part, DataPro said that globally, banks this year will be able to maintain the improved performance they achieved in 2021 thanks to the easing of restrictions induced by COVID-19. He noted, however, that different types of risks lurk in the regions. According to her, 2022 should see an acceleration of the regulatory debate on less traditional types of risks, including environmental and technological risks.

“The Basel Committee, for example, recently published a consultation paper on a principles-based approach for the effective management and monitoring of climate-related financial risks. It is believed that banks will, next year, accelerate their initiatives to integrate these risks into their credit culture, strategy and risk management,” noted DataPro.

The Basel Committee last year proposed Basel III, which modified the old Basel II framework. According to GTCO, the new framework aims to strengthen banks’ capital and liquidity positions for greater stability in the global financial sector. He said the new framework should strengthen the levels and quality of capital, as well as improve banks’ liquidity position.

These are regulatory reforms intended to safeguard the international banking system, by maintaining certain ratios and reserve capital.

Changes introduced in Basel III include splitting Tier 1 capital into Common Equity Tier 1 (CET1) and Additional Tier 1 (AT1) capital with minimum ratios of 10.5% and 0.75 % respectively. Previously, under Basel II, banks’ capital was only divided into Tier 1 and Tier 2.

The new classifications also introduced a liquidity coverage ratio (LCR) to banks’ existing performance ratios, GTCO noted. This ratio requires banks to “hold enough high liquid assets that are strong enough to survive a specified period of stressed funding scenario,” the bank noted.

The new framework also specified a minimum capital requirement of 15% for DMBs with an additional 1% for banks designated as DSIBs (16%). Similarly, an additional capital buffer of 1% for the Capital Conservation Buffer (CCB1) will be required under Basel III, which raises the total minimum capital requirement to 16% for banks and 17% for DSIBs.

The new guidelines also introduced a countercyclical capital buffer (CCB2) which has been set within a range of 0-2.5% and will be determined by the CBN from time to time. CCB2 is currently set at 0% by the CBN, according to GTCO.

“Generally, Basel III capital requirements are stricter to prevent banks from taking undue risks that can impact the financial system,” the bank noted.

In the ratings space, DataPro expects “speculative-grade defaults” to remain low this year, but provided there are no political surprises or economic setbacks. “Abundant and cheap liquidity, heightened risk appetite and investors’ search for yield have led to strong demand for credit across the rating spectrum, allowing companies to refinance debt and extend maturities, limiting short-term refinancing risks,” he noted. He warned, however, that defaults could result from new funding risks, shorter maturities in some sectors and regions most dependent on market liquidity, adding that even bankruptcies could also increase among small and medium-sized businesses. businesses.