One of the major ratings agency, Agusto & Co. upgraded the country's banking sector yesterday by one notch to Bbb from Bb, with a stable outlook, citing improved earnings and capital ratios.
In a ratings report on Nigerian banks, the agency said credit growth was gradually returning and risk aversion waning as banks recovered from the shock of a $4 billion bailout in 2009.
It said the upgrade was based on the banks' financial conditions and their capacity to meet their obligations, assuming the political environment did not get any riskier.
Nigerian banks have staged a sharp recovery in earnings during the first half of 2012, with mid-tier lender Diamond Bank posting a fourfold profit rise, while First Bank and UBA doubled profits during the period.
"In view of marked improvements in the banking landscape during 2011, Agusto & Co. has upgraded the industry rating to Bbb, from Bb," the agency said, adding that the sector was adequately capitalised.
Nigeria's 19 lenders have swung back to profit, thanks to a state-owned "bad bank" - Asset Management Corporation of Nigeria (AMCON) absorbing their non-performing loans in exchange for government backed bonds.
"With sale of troubled loans worth over N1.5 trillion ($9.5 billion) to AMCON during the year, banks were able to free up their balance sheets and focus more on creating risk assets."
It said non-performing loans declined to N328 billion ($2.1 billion), representing 4.8 per cent of loans in 2011, compared with an impaired loan ratio of 16 percent in 2010.
Global ratings agency Fitch two weeks ago said that Nigerian banks continued to face challenges despite AMCON's support and that credit had grown rapidly by 30-66 per cent in 2011. It said lenders had thin levels of "core capital".
Agusto said Nigeria's top five lenders - First Bank , Zenith Bank, UBA, Guaranty Trust Bank and Access Bank - accounted for much of the growth in total assets last year.