Losses mount for Nigerian bank stocks after new CBN directive

Nigerian bank stocks continued to fall on Tuesday as investors reacted to a new policy from the Central Bank of Nigeria (CBN), signalling trouble for some banks still depending on old regulatory support to cover bad loans.

The NGX Banking Index, which tracks the performance of listed banks, has lost nearly 5% since the CBN issued its latest circular on Friday. Shares of Sterling Bank and Zenith Bank were among the biggest losers on Tuesday, as nervous investors dumped stocks tied to the new restrictions.

At the heart of the selloff is “regulatory forbearance,” a support programme introduced by the CBN during the COVID-19 pandemic to help banks manage rising bad loans. Under that arrangement, banks were allowed to delay marking some loans as bad, which protected their profits at the time.

That grace period is now getting over. According to analysts at Renaissance Capital, much of the risky loans affected were linked to Nigeria’s oil and gas sector. “The CBN is now practically saying: You’ve made enough profits in the past few years—time to clean up those bad loans,” said a Lagos-based financial analyst.

He said the new rule will help build a stronger banking industry, able to withstand economic shocks.

The impact has been swift. Sterling Bank was down 8.91% on Tuesday, trading at ₦5.01 by early afternoon. Zenith Bank dropped 8.19% to ₦43.15, while First Bank Holdings lost 5.28%, selling at ₦25.10 per share.

UBA fell 5.43% to ₦32.30, with FCMB down slightly at ₦9.10. Fidelity and GTCO posted small gains.

Data from Renaissance Capital shows that Zenith Bank, First Bank, and Access Bank have the largest exposures to these risky loans, with 23%, 14%, and 4% of their total loans affected.

With the size of their exposures and current levels of loan loss reserves, Renaissance Capital expects that Zenith, First Bank, and Access Bank may not be able to resume dividend payments until as late as 2028.

“As such, we expect dividend payments henceforth to come from the non-banking subsidiaries of the above-mentioned Groups. Given that majority of these Group’s income is primarily from their banking business, we do not see any substantial dividend payments from their non-banking subsidiaries,” it said.

On the brighter side, banks like GTCO and Stanbic IBTC have no regulatory forbearance exposure, while Fidelity and FCMB are sitting on more manageable risk levels of 10% and 8% respectively. UBA’s exposure is smaller, between 5% and 6% of its loans.

But it’s not just about risky loans. Banks with smaller cushions to cover bad loans could face more trouble as they adjust to the new rules. Zenith Bank, however, leads the pack with a strong Non-Performing Loan (NPL) coverage ratio of 223% – meaning it has set aside more than double what’s needed to cover its bad loans. GTCO and Fidelity are also on solid ground with ratios above 138%.

Why this matters: The policy shifts under CBN Governor Olayemi Cardoso points to stricter banking oversight going forward, ending the leniency that helped banks through the pandemic years.

For investors, the lesson is clear: Big banks don’t always mean safe bets. While the sector will recover, dividends from some banks could dry up for years.