Nigerian banks still face challenges despite some improvement in their asset quality, Fitch Ratings said in its newly-published special report titled "Nigerian Banking Sector: Rapid Credit Growth Returns."
It said that the recent rapid credit growth in the Nigerian banking sector may give rise to weakened asset quality and higher impairment charges if left unchecked.
A director in Fitch's Financial Institutions team Denzil De Bie said: "There was a marked improvement in banks' asset quality during 2011 following the sale of problem loans to the Asset Management Corporation of Nigeria.
"However, rapid underlying credit growth of 30 -66 percent was evident in most of the Fitch-rated banks in 2011 which the agency considers will be a negative credit driver if it continues."
The special report highlights some of the key rating drivers of Nigerian banks in the context of their mostly 'b' range Viability Ratings.
De Bie said: "Fitch considers that many Nigerian banks have thin levels of Fitch Core Capital, which are lower than is appropriate for Nigeria's difficult operating environment. Sustainable Fitch Core Capital ratios will be a key rating driver for any future positive action on the banks' Viability Ratings."
Fitch considers that improved efficiency will be a key differentiator for the more successful banks and will support earnings growth and ultimately contribute to better internal capital generation.
The Central Bank of Nigeria, during its last Monetary Policy Committee meeting, expressed worry that banks are not lending to the real sector.
Banks preferred to access government securities and bonds instead of lending to the real sector, but the CBN has increased the Cash Reserve Ratio of bansks from 8 to 12 percent to reduce the amount of money in circulation.
The central bank has also issued circular to banks directing them not to use funds obtained from CBN lending windows in inter-bank market.