BANKING SYSTEM OUTLOOK – NIGERIA

Outlook remains positive on forbearance exit and better foreign currency liquidity

We have maintained our positive outlook for Nigeria's (B3 stable) banking sector. Solid economic growth will be underpinned by a continued, gradual recovery in oil production and sustained expansion of the non-oil economy. Loan quality will improve modestly, as easing inflation, coupled with monetary policy loosening, boosts borrowers' repayment capacity. The system's recent exit from pandemic-related regulatory forbearance will enhance resilience to risks arising from loan portfolios and improve transparency. System-wide foreign currency liquidity will continue to improve following the reform of the country's foreign exchange management. However, capitalisation ratios will decline slightly because of asset growth and high loan-loss provisioning costs, although they will remain high. The large majority of banks have successfully raised capital during 2025 to meet the central bank's increase in the minimum regulatory capital, which will be implemented in March 2026. Local currency liquidity will remain somewhat constrained because of elevated cash reserve requirements. We expect profitability to remain solid, as growth in gross interest income – amid strong loan expansion – will offset the squeeze on net interest margins from lower policy rates, and the elevated provisioning following the exit from forbearance measures.

DETAILED ANALYSIS

Sound economic growth and improved macroeconomic stability will support the operating environment. Solid economic growth will be underpinned by a continued gradual recovery in oil production and sustained expansion of the non-oil economy, particularly in the agriculture, trade and technology sectors. This sound economic growth, together with a deceleration in inflation, a stable currency, improving foreign exchange reserves and a strong trade balance, will support the country's macroeconomic stability. We expect real GDP growth to remain solid in 2026, after reaching an estimated 3.9% in 2025. Following a history of stable but lacklustre growth — constrained by low oil output and dollar liquidity shortages — recent foreign-exchange reforms have boosted liquidity. This will likely reduce constraints on economic activity, although the expansion will remain insufficient to materially improve living standards amid rapid population growth.

Loan quality will improve modestly. Easing inflation, coupled with gradual monetary policy loosening, will enhance borrowers' repayment capacity. In addition, the gradual improvement in the performance of several long-standing, large, restructured oil and gas exposures will support loan quality, following the return of assets to production and the identification of alternative crude evacuation routes to address security issues and theft. The system's recent exit from pandemic-related regulatory forbearance is prompting banks to significantly increase provisioning against some loans, thereby enhancing their resilience to risks. The exit from forbearance has also increased systemwide problem loans, thereby improving transparency and the comparability of banks' reported loan quality metrics with international peers. The underreporting of problem loans had obscured the underlying asset quality performance of the sector for several years. Although we expect the systemwide problem loan ratio to increase as at end 2025, it should gradually improve over the coming years as a result of further progress on problem loan resolutions, along with the benefit from lower interest rates and inflation.

Capitalisation will decline modestly but remain strong. System-wide capital ratios will decline slightly because of asset growth and elevated provisioning requirements. Banks have raised capital in response to the central bank's directive to increase the minimum regulatory capital base, which will be fully implemented in March 2026. The increase in capitalisation ratios also reflects higher earnings retention over recent years, given substantial foreign-exchange gains amid currency devaluation and the repricing of loans and securities amid elevated interest rates. The sector wide Tier 1 capital ratio stood at 18.4% as of June 2025; while the tangible common equity-to-risk-weighted assets ratio for rated Nigerian banks was 26.8% as of December 2024 (it declines to 19.9% when excluding some reserves, such as foreign currency translation reserves, fair value reserves or credit risk reserves).

Profitability will remain solid. Interest income will increase on the back of strong loan growth, although the benefit will be constrained by narrower net interest margins as a result of lower policy rates. Fees and commissions will grow in line with business activity, while trading income will remain broadly stable after declining in 2025 because of the non-recurring nature of foreign-exchange gains recorded over the previous two years. Loan-loss provisioning will likely remain elevated during 2026 because of the exit from regulatory forbearance, but should ease in the second half of 2026 as robust economic growth, lower interest rates and reduced provisioning needs on forbearance-related exposures provide support.

Foreign currency liquidity will continue to improve. This will reflect the reform of the country's foreign exchange management, the increase in remittances, the repayment of central banks swaps and the clearing of a significant portion of unsettled central bank foreign exchange forward contracts. It also shows that the expanded funding capacity built by international banks over the last decade (to support Nigerian banks' financing of import transactions during foreign currency shortages) remains in place, even though the system's need for this funding has materially declined. The reduction in foreign currency shortages faced by local nonfinancial companies will significantly lessen liquidity risks for banks providing them with trade finance. The level of local currency liquidity held on the banks' balance sheets will remain high, but elevated cash reserve requirements will constrain the liquidity available to the banking system for day-to-day liquidity management.

The government's willingness to support banks will remain high. We believe there is a high likelihood that the authorities would provide support for banks if needed. However, this does not enhance banks' ratings, as the government's own rating is aligned with the banks' standalone Baseline Credit Assessments. Our assumption of a high probability of support is underpinned by the authorities' track record of assisting banks in times of financial stress.

EXHIBIT 1: AGGREGATE KEY INDICATORS FOR THE BANKS WE RATE

RATING UNIVERSE

We rate eight banks in Nigeria, which together accounted for 95% of the banking system's assets as of December 2024. Nigerian banks' Baseline Credit Assessments (BCAs), reflecting our view of their standalone financial strength, are positioned at b3. The weighted average long-term deposit rating is B3, with no government support uplift incorporated into the ratings.

Nigerian banks, with aggregate assets of $110 billion as of December 2024, play a central role in the country's financial intermediation. The banking system comprises 25 institutions, with the four largest accounting for 75% of total assets. Islamic banking remains relatively nascent, representing just 1.3% of total banking assets as of September 2024.

EXHIBIT 2: RATED BANKS IN NIGERIA

BANKING SYSTEM OUTLOOK DEFINITION

The Banking System Outlook reflects our view of credit fundamentals in the banking system over the next 12-18 months. Banking System Outlooks are distinct from rating outlooks, which, in addition to sector dynamics, reflect an issuer's specific characteristics and actions. The outlook does not represent a sum of upgrades, downgrades or ratings under review, or an average of rating outlooks.