Government securities now account for about 11 per cent of Nigerian banks’ total assets, underscoring years of constrained credit extension and a sustained tilt towards lower-risk sovereign instruments, according to a new banking sector outlook by S&P Global.
The ratings firm said the rising exposure has increased banks’ sensitivity to sovereign-related shocks, though this risk is expected to ease gradually as lending to the real economy improves and macroeconomic conditions stabilise.
It added that the close link between banks and the sovereign should moderate as credit growth gradually picks up, fiscal deficits narrow, and economic conditions improve.
“Banks’ share of government securities has been increasing in recent years due to limited credit extension and now accounts for about 11 per cent of the bank’s total assets. The growing exposure increases its vulnerability to sovereign-related shocks.
“We expect the nexus between banks and sovereign risks to slightly moderate as lending gradually increases, targeting real sectors of the economy and as fiscal deficits narrow and economic conditions improve,” the ratings firm said.
In its Nigerian Banking Outlook for 2026, the firm noted that, despite regulatory headwinds, tighter capital requirements, and easing interest rates, Nigerian banks are expected to remain resilient and maintain positive profitability over the medium term.
It said banks’ holdings of government securities have increased in recent years due to limited credit extension, and that this growing exposure heightens vulnerability to sovereign-related shocks.
The report projected Nigeria’s real GDP growth to average 3.7 per cent over 2025 and 2026, supported by activity in both the oil and non-oil sectors. Inflation is expected to moderate gradually to around 21 per cent in 2026, creating room for further monetary easing after 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 largely by increased lending to the oil and gas, agriculture, and manufacturing sectors.
Lending to the oil and gas sector is expected to support higher production following measures aimed at curbing militancy and crude oil theft, while retail lending is projected to make only a marginal contribution to overall loan growth due to its relatively small share of banks’ portfolios.
Despite the headline growth, the firm said real credit expansion would remain modest, reflecting high inflation and lingering structural constraints. It also flagged concentration risks within banks’ loan books, noting that about half of loans are denominated in foreign currency and roughly one-third of total exposures are linked to the oil and gas sector.
Also, around half of gross loans are concentrated among the top 20 borrowers, increasing vulnerability to sector-specific and single-name shocks.
Asset quality deteriorated in 2025 following the removal of regulatory forbearance on oil and gas sector exposures, with nonperforming 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 institutions have written off affected exposures, others are still restructuring them. The ratings firm expects nonperforming loan ratios to stabilise at between six per cent and seven per cent in 2026, assuming oil prices average around $60 per barrel, a level it considers sufficient to support borrower solvency.
Stage two loans are also expected to remain elevated at about 20 per cent to 22 per cent, reflecting ongoing credit risk in restructured facilities. It forecast that Nigerian banks’ profitability would decline slightly in 2026 but remain strong by regional standards.
Average return on equity is projected to normalise 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 expected to ease 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 decline, the firm said they would remain high relative to peer markets, thereby supporting net interest margins, while non-interest income is expected to benefit from higher fees and commissions driven by expanding digital payments, retail banking services, and agency banking networks.
The PUNCH earlier reported that the government’s borrowings from financial market operators rose sharply in 2025 despite high interest rates, widening the gap between public and private sector access to credit, according to data obtained from the Central Bank of Nigeria.
An analysis of money and credit statistics showed that credit to the Federal Government outpaced private-sector borrowings by N9.19tn in 2025, reflecting a 695.6 per cent swing and heightened fiscal pressures, as well as increased reliance on local funding sources.
According to CBN data, public-sector credit increased significantly in 2025, rising from N25.03tn in January to N34.22tn by December, representing a N9.19tn increase over the year.
It also represented an increase of N5.57tn, or nearly 154 per cent, compared with the N3.62tn government credit recorded in 2024.
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