Fitch: Bank Loans to Government, High CRR put Nigerian Banks at Risk
Fitch Ratings has warned that Nigerian banks face rising risks due to their heavy exposure to government debt and burdensome regulatory policies of the Central Bank of Nigeria (CBN).
The agency estimates that sovereign-related assets comprising treasury bills, bonds, and unremunerated reserves account for 35% of total banking sector assets and 350% of total equity.
Fitch noted that this level of exposure creates a material concentration risk that could severely impact bank solvency in the event of a sovereign default.
Speaking during a recent webinar co-hosted by Fitch and Renaissance Capital, Tim Slater, Director for African Banks at Fitch Ratings, said the sector continues to face regulatory hurdles, most notably the Cash Reserve Ratio (CRR), which requires banks to deposit 50% of their naira deposits with the CBN without earning any interest.
The cash reserves placed at the Central Bank are unremunerated and therefore constrain the banking sector’s profitability,” Slater stated.
He revealed that as of December 2024, unremunerated cash held at the Central Bank accounted for a substantial 17% of total banking sector assets, up from 12% in 2016 and represented 46% of naira deposits, compared to 27% in 2016.
This, he said, significantly limits banks’ ability to extend credit or generate returns on assets.
However, while the official CRR was raised from 32.5% to 50%, Slater noted that the actual burden on banks was previously more severe due to ad hoc debits imposed under the former CBN leadership.
“The previous leadership tended to force banks to place cash at the Central Bank on an ad hoc basis whenever it perceived high pressure on the exchange rate,” he explained. “This often resulted in actual cash reserve levels far exceeding the official requirement.”
According to Slater, this practice has changed under the current CBN leadership. The actual CRR now aligns more closely with the official requirement, bringing greater consistency and predictability.
“So, although the official requirement has increased significantly, the amount of cash placed at the Central Bank has not,” he said. “This greater transparency in how the requirement is applied is helping banks plan better and manage their tight liquidity more effectively.”
The CRR requirement is certainly the most significant, but other regulations and policy actions by the authorities have also negatively impacted the banking sector’s financial profile.
Firstly, banks are now subject to a minimum loan-to-deposit ratio (LDR) of 50%, which incentivizes more aggressive lending than many institutions would otherwise adopt based on their own risk appetite.
While the policy is designed to stimulate credit to the real sector, it may expose banks to greater credit risk and contribute to a build-up in non-performing loans (NPLs) over time, especially if lending is not matched by improvements in borrower quality or sectoral resilience.
Secondly, the Central Bank has prohibited banks from maintaining net long foreign currency positions on an unconsolidated basis since early last year. This forces banks to sell excess foreign currency into the market, thereby supporting the naira, but at the expense of reducing their ability to benefit from FX revaluation gains during periods of depreciation.
As a result, banks will no longer benefit from FX revaluation gains in the event of a further naira devaluation, which reduces their ability to hedge against foreign exchange risk.
Finally, the authorities have imposed a windfall tax on certain FX gains booked by banks following the devaluation, further eroding profitability and limiting the sector’s capacity to absorb currency-related shocks.
In Fitch’s view, these policies, though aimed at ensuring macroeconomic stability and supporting the naira, are squeezing bank profitability and limiting operational flexibility.
The warning comes as the Central Bank of Nigeria (CBN) recently directed banks to suspend dividend payments if they remain under regulatory forbearance, particularly for loans to the oil and gas sector that have not yet been fully restructured.
Fitch emphasized that many of these exposures are large and dollar-denominated, resulting in breaches of the Single Obligor Limit (SOL) and posing significant risks to capital adequacy ratios.
“Obligor limit breaches are a major impediment to banks exiting forbearance,” Slater explained, adding that without an extension of forbearance, many such loans would be reclassified as impaired, triggering substantial provisioning requirements.
While the directive raised concerns in the market, the majority of affected banks have responded by assuring stakeholders of their commitment to regulatory compliance, plans to exit forbearance, and intentions to maintain dividend payments.
For example, FirstHoldCo Plc has reaffirmed its commitment to comply with the CBN’s prudential guidelines, including addressing breaches of the Single Obligor Limit and exiting forbearance on its credit exposures.
In a statement issued on Thursday, June 19, 2025, the HoldCo explained that the SOL breach by its banking subsidiary, FirstBank, involves two foreign currency loan exposures significantly impacted by the over 200% Naira devaluation between 2023 and 2024.
Regarding the forbearance facilities, FirstHoldCo clarified that the affected loans are part of syndicated industry exposures, and that the consortium of lenders involved is currently working to restructure and re-tenor the facilities in line with improved asset performance and cash flow outlook.
The bank also assured shareholders of its intention to continue with dividend payments in 2025 and beyond, subject to regulatory approval and compliance.
Slater also made a quick but important point on the sovereign constraint affecting Fitch’s bank ratings.
“Banks cannot be rated above the sovereign,” he concluded, citing the sector’s significant exposure to the Nigerian government through its holdings of government securities and unremunerated reserves at the CBN.
As previously noted, the Nigerian banking sector holds a substantial amount of sovereign assets, with Fitch estimating these exposures, comprising government fixed income securities and CBN reserves, at 35% of total domestic banking sector assets and 350% of total equity as of December 2024.
Fitch explained that this level of exposure poses a material concentration risk, making banks’ solvency highly sensitive to any losses imposed on sovereign creditors in the event of a hypothetical sovereign default.
This exposure may also partly be driven by the CBN’s 30% liquidity ratio requirement, which encourages banks to hold a large share of their liquid assets in the form of government securities.
“This, combined with the concentration of operations within Nigeria, means many of the largest banks have their long-term Issuer Default Ratings (IDRs) capped at the level of the sovereign,” Slater added.
