Fitch Ratings has reported that Nigeria’s banking sector has been able to absorb the capital strain triggered by the Central Bank of Nigeria’s (CBN) withdrawal of regulatory forbearance, as lenders relied on stronger capital buffers built through the industry’s ongoing recapitalisation exercise despite a sharp rise in impaired loans.

In a report released on Tuesday, the global rating agency stated that the new paid-in capital requirements, which became effective at the end of the first quarter of 2026, enabled many banks to withstand the deterioration in asset quality that followed the central bank’s decision to withdraw longstanding regulatory forbearance at the end of the first half of 2025.

It stated: “Nigerian banks’ impaired loans ratios increased sharply, putting pressure on capitalisation, following the withdrawal of longstanding forbearance at end-1H25. “However, this pressure was offset by good internal capital generation and capital raisings to meet new paid-in capital requirements that became effective at end-1Q26.”

Fitch noted that while the withdrawal of regulatory forbearance led to a sharp deterioration in banks’ asset quality, it expects the increase in impaired loans to reverse, with the industry’s impaired loan ratio falling to about five per cent by the end of 2026 as higher oil production, firmer oil prices and loan write-offs take effect.

It stated: “The regulatory forbearance withdrawal led to some problem loans, particularly oil and gas loans, being reclassified as impaired.

“The banking sector’s impaired loans ratio increased to 8 per cent at end-1M26 from 4.5 per cent at end-2024 but Fitch expects it to decline to about 5 per cent at end-2026 on higher oil production and prices, and write-offs.”

The report also underscored the significance of the banking sector’s recapitalisation drive, noting that fresh equity injections have strengthened lenders’ ability to absorb additional provisioning requirements and regulatory deductions without breaching capital thresholds.

Furthermore, Fitch stated: “Capital raising to meet the new requirements have enabled many banks to absorb additional provisions, particularly prudential provisions that completely disregard collateral, resulting from higher impaired loans, and capital deductions resulting from single-obligor limit breaches, while generally remaining compliant with their respective minimum total capital adequacy ratio requirements.”

On earnings, Fitch observed that profitability weakened in 2025 as banks contended with significantly higher loan impairment charges while also losing the sizeable foreign exchange revaluation gains that boosted earnings following the naira devaluations of 2023 and 2024.

It stated: “Profitability generally declined in 2025 due to increased loan impairment charges and the lack of foreign-exchange revaluation gains that occurred because of the devaluation of the Nigerian naira in 2023-2024.”

Nevertheless, the agency expects earnings to recover moderately this year.

It stated that profitability should improve on declining loan impairment charges and net interest margins remaining broadly stable as the CBN pauses its monetary easing in response to renewed inflationary pressures.

Fitch also projected a sharp rebound in credit creation as banks begin deploying the capital raised under the recapitalisation programme.

The agency forecasts, “loan growth to accelerate to about 20 per cent in 2026 from two per cent in 2025 as banks begin deploying the fresh capital they have raised.”

Beyond capital and profitability, Fitch noted that the sharp depreciation of the naira has also strengthened banks’ foreign currency liquidity by boosting activity in the foreign exchange market.

It stated: “The naira devaluation has benefitted sector foreign-currency liquidity as it has led to higher foreign-exchange market turnover. This improvement has been timely given that several banks have maturing Eurobonds. Foreign-currency liquidity stands to further benefit from higher oil prices.” (Arise News)

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