By Charles Abuede
- Exposed to high risks on rising loan portfolios
- Vulnerable on outsized government bonds holdings
- 49 banks in Africa extend $218bn to risk-prone sectors
- Advises climate, environmental risks in governance frameworks
Although the non-performing loans (NPLs) ratio of Nigerian banks stands at 6.3 per cent, above the prudential benchmark of five per cent, Moody’s Investors Service has asserted that banks in Nigeria, as well as those in South Africa and the Democratic Republic of Congo stand exposed to high risks environment as a result of their rising loan portfolios or their continuous lending to environmentally sensitive sectors. It says they are also vulnerable through outsized holdings of government bonds.
In a research study by the international agency on Africa’s financial institutions, Moody’s highlighted that African economies have always been susceptible to environmental risk but that climate change makes shocks more frequent and more severe. For African banks, it stated, disclosure of the risks they face and management of those risks are not yet well advanced.
The study predicts that environmental factors will lead to a deterioration of the banks’ credit quality and profitability in the long term if banks do not take measures to prudently manage climate-related and environmental risks. Loans extended to sectors classified as high or very high environmental risk range from 0.6 per cent to 26 per cent of the loan portfolios of these African rated banks, Moody’s revealed.
“Risks are exacerbated by outsized holdings of sovereign bonds, particularly for Angolan and Nigerian banks. Exposure to government securities for the 49 African banks that we rate across 14 countries range between 15 per cent and 35 per cent of total assets. This compares with between 6 per cent and 9 per cent for more advanced economies. Most African sovereigns face substantial risk from rising temperatures, water scarcity and carbon transition.
“Banks should consider climate-related and environmental risks in their governance and risk management frameworks, and when formulating and implementing their business strategy. Banks are now expected to become more transparent by enhancing their climate-related and environmental reporting and disclosure; adjustment to lending practices; stress testing and scenario analysis for environmental risk,” Moody’s asserted.
Nigerian banks with higher risk exposure resulting from lending to oil and gas companies
A cursory analysis of Moody’s assertions with the latest data obtained from the national central banks shows that Nigerian banks have the most loan risk exposure to oil and gas-related companies. It says lending to oil and gas-related companies among the rated banks in Nigeria was close to 26 per cent of its gross loans as of September 2020. This, according to the international credit rating institution, reflects the Nigerian economy’s heavy reliance on the industry. On the contrary, the agency noted that banks in Angola, despite its economy’s reliance on oil, do not show any meaningful exposure to the sector.
In line with what can be found in advanced countries, emerging economies’ investors are now beginning to pay growing attention to the rate or bank loan portfolios, and at the same time pressuring these lenders over their roles in financing companies within the oil and gas industry. On this, Moody’s noted that banks also in an indirect manner through the oil and gas sector they lend to, face carbon transition risk from green regulation, carbon taxes and fossil fuel subsidy reform, which has been introduced by several African countries, pointing out that the credit risks of the borrowers would increase if they fail to successfully change their business models as carbon transition risks escalate.
Most African banks lent extensively to environmentally sensitive industries, the study shows. It noted that aggregately, about 49 rated banks across 14 countries in Africa have extended almost $218 billion in loans to these sectors, representing almost 29 per cent of their total loan portfolio. Consequently, some of these banks have extended $17.3 billion to high-risk sectors such as “Mining – Metals and Other Materials excluding coal” and $23.6 billion to the “Oil and Gas – Integrated oil companies”, while $2.7 billion was extended to the very high-risk coal mining sector. In the light of the above statistic on bank lending to these risk-prone sectors, Moody’s has projected that borrowers could face diverse risks ranging from transition to low-carbon technologies as well as from fines or reputational damage and from carbon regulations that could impair their capacity to service their bank debt. This could lead to a higher risk of loans’ deterioration for banks and potentially reputational damage associated with lending to carbon-intensive or other environmentally unfriendly businesses.
According to the international agency, “African banks face environmental risk threats given their current exposure to environmentally sensitive industries. We have developed a global heat map identifying sectors we consider most at risk from climate change. The heat map shows that many of Africa’s largest industries, like oil and gas, mining and transport, face high environmental risks, given their high inherent exposure to carbon transition or physical climate risk. Other large sectors in Africa, such as agriculture, pose moderate credit risk on a global scale, but given high reliance on rain-fed agriculture and vulnerability to droughts, some African economies face graver dangers. Likewise, we consider tourism as having low environmental risk globally, but the tourism sector in Africa faces the threat of severe income loss from natural disasters.”
Nigeria and South African banks lead in the adoption of sustainable policies
Elsewhere in the study Moody’s observed that Nigeria and Angola sovereigns have the highest environmental risk issuer profiles scores for environmental considerations. This is hinged on the fact that Nigerian and Angolan governments are highly susceptible to risks from carbon transition given their significant reliance on oil.
“In a scenario of a rapid global transition to lower reliance on hydrocarbons that depresses global hydrocarbon demand and prices, the credit profiles of both countries would likely face downward pressure. Credit-negative pressure would stem mainly from weakening fiscal strength. It would unfold from 2025 and intensify from around 2030, when, according to the International Energy Agency’s projections, global demand and prices for oil would start to decline more rapidly. Gas demand would continue to rise for longer than oil demand, generally preserving revenue and exports of gas-reliant sovereigns for longer. Water scarcity risk and physical climate risk are also high. Large swathes of these countries’ population are exposed to unsafe drinking water and heat stress, as well as risks from waste and pollution,” Moody’s stated.
However, African banks have taken a longer time to embrace the threats of climate change than peers in more advanced economies universally. Though, it noted, some financial institutions across top African countries such as South Africa, Nigeria, Egypt, Morocco, Kenya, Togo, Ghana and Mauritius can lead in the environmental disclosure and green funding as well as in the adoption of sustainable energy policies. This can be seen, according to the credit agency, in the case of Nigeria’s leading lender – Access Bank that has taken the giant step to green funding by issuing Africa’s first Climate Bonds Certified Corporate green bond in April 2019. Similarly, Africa’s largest banking sector – The South African banking industry, has in recent years come under growing pressure to limit fossil fuel projects and the go-ahead to declare their risk which in response from the countries’ lenders, Absa Bank, Standard Bank, FirstRand, Investec Bank and Nedbank have all adopted the sustainable energy policies and have started to disclose their oil and gas linked lending.
Conclusively, credit risk from environmental vulnerabilities in sectors such as oil and gas, trade, mining, manufacturing, agriculture, farming and fishing will continue to grow as the transition away from fossil fuels progresses rapidly and as the adverse effects of physical climate change deepen. Companies in these sectors are also under significant investor and consumer pressure to detail how they are incorporating the impact of climate change into their business plans.