Government Securities Account for 11% of Banks’ Total Assets

Government securities now make up roughly 11 per cent of Nigerian banks’ total assets, highlighting prolonged constraints on credit expansion and a sustained preference for lower-risk sovereign instruments, according to a new banking sector outlook by S&P Global.

The ratings agency noted that the growing exposure has increased banks’ sensitivity to sovereign-related shocks. However, it expects this risk to ease gradually as lending to the real economy improves and macroeconomic conditions stabilise.

S&P Global added that the close relationship between banks and the sovereign is likely to weaken over time as credit growth gains momentum, fiscal deficits narrow, and overall economic conditions strengthen.

According to the firm, banks’ holdings of government securities have risen in recent years due to limited credit extension, accounting for about 11 per cent of total banking assets. While this trend heightens vulnerability to sovereign risks, the agency expects a gradual moderation as lending increasingly targets productive sectors of the economy and fiscal pressures ease.

In its Nigerian Banking Outlook for 2026, S&P Global said that despite regulatory challenges, stricter capital requirements, and easing interest rates, Nigerian banks are expected to remain resilient and sustain positive profitability over the medium term.

The report projected Nigeria’s real GDP growth to average 3.7 per cent in 2025 and 2026, supported by activity in both the oil and non-oil sectors. Inflation is expected to slow gradually to around 21 per cent in 2026, creating space for further monetary easing following the 50-basis-point interest rate cut implemented in September 2025.

Against this backdrop, nominal credit growth is forecast at about 25 per cent, driven mainly by increased lending to the oil and gas, agriculture, and manufacturing sectors.

Lending to the oil and gas sector is expected to boost production following measures to curb militancy and crude oil theft, while retail lending is projected to contribute only marginally to overall loan growth due to its relatively small share of banks’ portfolios.

Despite the projected growth, the firm said real credit expansion would remain modest, reflecting high inflation and persistent structural constraints. It also highlighted concentration risks in banks’ loan books, noting that about half of loans are denominated in foreign currency, around one-third of total exposures are linked to the oil and gas sector, and roughly half of gross loans are concentrated among the top 20 borrowers. These factors increase vulnerability to sector-specific and single-borrower shocks.

Asset quality weakened in 2025 following the removal of regulatory forbearance on oil and gas exposures, with non-performing loans rising to about 7 per cent from 4.9 per cent in 2024 as banks began recognising previously restructured or deferred problem loans.

While some banks have written off affected exposures, others are still restructuring them. S&P Global expects non-performing loan ratios to stabilise between 6 per cent and 7 per cent in 2026, assuming oil prices average around $60 per barrel, a level considered adequate to support borrower solvency. Stage-two loans are also projected to remain elevated at between 20 per cent and 22 per cent, reflecting ongoing credit risks in restructured facilities.

The firm forecast that bank profitability would ease slightly in 2026 but remain strong by regional standards. Average return on equity is expected to moderate to between 20 per cent and 23 per cent in 2026, down from an estimated 25 per cent in 2025, while return on assets is projected to decline slightly to about 3.0 per cent to 3.1 per cent.

Profitability is expected to be supported by still-elevated interest margins, growth in non-interest income, and slightly lower loan loss provisions. Although interest rates are projected to fall, they are expected to remain high relative to peer markets, supporting net interest margins. Non-interest income is also likely to benefit from higher fees and commissions driven by expanding digital payments, retail banking services, and agency banking networks.

Meanwhile, data from the Central Bank of Nigeria show that government borrowing from financial market operators rose sharply in 2025 despite elevated interest rates, widening the gap between public- and private-sector access to credit.

An analysis of money and credit statistics indicates that credit to the Federal Government exceeded private-sector borrowing by N9.19 trillion in 2025, reflecting heightened fiscal pressures and increased reliance on domestic funding sources.

CBN data further show that public-sector credit rose from N25.03 trillion in January 2025 to N34.22 trillion by December, representing a N9.19 trillion increase over the year. This also marked an increase of N5.57 trillion, or nearly 154 per cent, compared with the N3.62 trillion in government credit recorded in 2024.