Rating agency Standard & Poors sees bright prospects in Nigeria's banking sector, according to a report it released on Wednesday, which attributed the positive view to on-going reforms by the central bank.

S&P said that higher risk lending and access to low cost funding would be the basis for assessment and performance in the future.

 “After more than two years of central bank support, Nigeria’s commercial banks are again engaging with the domestic economy. Nigeria now has fewer, but larger banks, with better corporate governance and regulatory oversight," said S&P.

However, S&P said the sector needs a longer regulatory track record before key risks such as corporate governance and regulatory oversight are eliminated.

In 2009, eight of the country’s 24 banks had to be rescued, after weak risk management and corporate governance lapses caused nonperforming loans to rise to more than a third of total loans across the banking system.

The CBN responded strongly, removing executive teams from failed banks, fully guaranteeing the interbank market, and setting up the Asset Management Corporation of Nigeria (AMCON) to purchase a large proportion of nonperforming loans from Nigerian banks. It also set up sizable intervention funds to support credits to the real economy, and is facilitating a series of mergers between failed banks and their stronger competitors.

Said S&P: “In our view, long-term success for Nigerian banks will chiefly depend on them enhancing their risk management, improving their governance, diversifying their loan portfolios, and securing their funding profiles.”

In a similar report, investment bank, Renaissance Capital, said that based on the scope of the banking sector’s write off of non-performing loans and its impact on the capital base and capital adequacy ratio, the banks are capable of absolving losses without any further bail out from the authorities.

Source: Business Day