Nigerian Banks exposure to debts highly violatile — Fitch raises alarm

Fitch Ratings has sounded the alarm over mounting risks facing Nigerian banks, citing their heavy exposure to government debt as a major vulnerability.

According to the agency, an estimated 35 percent of the banking sector’s total assets are invested in sovereign-related instruments such as treasury bills, bonds, and unremunerated reserves.

More strikingly, these exposures amount to an extraordinary 350 percent of total equity. This level of concentration, Fitch warns, could seriously undermine the solvency of Nigerian banks in the event of a sovereign default.

Speaking during a recent webinar hosted jointly by Fitch and Renaissance Capital, Tim Slater, Director for African Banks at Fitch Ratings, drew attention to ongoing regulatory challenges confronting the sector. 

Chief among them is the Cash Reserve Ratio (CRR), which requires banks to deposit 50 percent of their naira holdings with the Central Bank of Nigeria (CBN) without earning any interest.

“The unremunerated cash reserves held at the Central Bank fundamentally restrict the banking sector’s profitability,” Slater stated. As of December 2024, these idle cash reserves accounted for 17 percent of the sector’s total assets, up from 12 percent in 2016. 

In terms of deposits, they represented a substantial 46 percent of total naira deposits, nearly doubling from 27 percent in 2016, severely curbing banks' ability to extend credit or earn returns.

Although the official CRR has been increased sharply from 32.5 percent to 50 percent, Slater pointed out that the previous CBN administration often applied the rule inconsistently. 

“The former leadership imposed additional cash reserve demands on an ad hoc basis whenever exchange rate pressures arose,” he said, explaining that this led to reserve levels frequently exceeding the stated requirement.

A more disciplined approach has emerged under the current CBN leadership, he noted. The actual CRR burden now more closely reflects the official rate, providing banks with greater clarity and consistency. “Even though the requirement has increased, the amount of cash placed at the Central Bank hasn’t,” Slater added.

“This improvement in transparency around CRR enforcement is enabling banks to plan more effectively and manage tight liquidity with greater precision.”

Fitch also pointed out that several of these exposures are sizeable and dollar-denominated, resulting in breaches of the Single Obligor Limit (SOL) and threatening capital adequacy.

“Breaches of obligor limits are a significant hurdle to banks moving out of regulatory forbearance,” Slater remarked. 

Without a continued forbearance regime, many of these loans would have to be reclassified as impaired, prompting large provisioning requirements. While this has raised concerns in the market, many of the impacted banks have reaffirmed their intention to comply with CBN rules, exit forbearance, and maintain dividend distributions.

One such institution, FirstHoldCo Plc, issued a statement on Thursday, 19 June 2025, reaffirming its adherence to CBN prudential guidelines. The company addressed its subsidiary FirstBank’s SOL breach, attributing it to two foreign currency loan exposures that were heavily affected by the more than 200 percent naira devaluation between 2023 and 2024. 

On the issue of forbearance, FirstHoldCo clarified that the affected loans were part of industry-wide syndicated facilities and that the lending consortium is actively working to restructure and re-tenor the facilities, citing improving asset performance and cash flow forecasts. The HoldCo also confirmed its commitment to paying dividends in 2025 and beyond, subject to regulatory approval.

Slater drew a critical conclusion: Nigerian banks cannot be rated above the sovereign. This constraint stems directly from their heavy exposure to government-linked assets, including securities and unremunerated reserves held at the CBN. 

As previously noted, these assets make up 35 percent of total banking sector holdings and 350 percent of total equity as of December 2024.

This level of exposure presents a pronounced concentration risk. It leaves banks especially vulnerable to potential losses if the government were to default on its obligations. 

The exposure is further compounded by the CBN’s 30 percent liquidity ratio requirement, which steers banks toward holding a large proportion of liquid assets in government securities.

“This, together with the fact that many of the major banks operate almost entirely within Nigeria, means their long-term Issuer Default Ratings (IDRs) are capped at the sovereign level,” Slater concluded, underlining the deep interdependence between Nigeria’s fiscal outlook and the health of its banking sector.