Nigerian banks’ exposure to government securities has risen sharply in recent years, now accounting for approximately 11% of their total assets, according to S&P Global’s latest Nigerian Banking Outlook for 2026.
The ratings agency attributes the increased holdings to limited credit extension to the private sector, pushing banks toward lower-risk sovereign instruments such as Treasury bills and bonds. While this strategy has supported balance-sheet stability amid high interest rates and regulatory pressures, it has heightened banks’ vulnerability to sovereign-related shocks.
S&P expects the close link between banks and government risks to moderate gradually as credit flows to the real economy pick up, fiscal deficits narrow, and broader macroeconomic conditions improve.
The report forecasts Nigeria’s real GDP growth to average 3.7% over 2025 and 2026, supported by activity in both oil and non-oil sectors. Inflation is projected to ease toward 21% in 2026, creating space for further monetary easing following the 50-basis-point rate cut in September 2025.
Nominal credit growth is expected to reach around 25% in 2026, driven mainly by lending to oil and gas, agriculture, and manufacturing. Retail lending is likely to contribute only marginally due to its small share of portfolios. Real credit expansion, however, will remain modest because of high inflation and persistent structural constraints.
The outlook flags concentration risks in banks’ loan books: roughly half of loans are denominated in foreign currency, about one-third of total exposures are linked to oil and gas, and around half of gross loans are concentrated among the top 20 borrowers — making the sector vulnerable to sector-specific or single-name shocks.
Asset quality deteriorated in 2025 after the removal of regulatory forbearance on oil and gas exposures, pushing the non-performing loan (NPL) ratio to about 7% from 4.9% in 2024. Some banks have written off affected loans, while others continue restructuring. S&P anticipates NPL ratios will stabilise between 6% and 7% in 2026, assuming oil prices average around $60 per barrel — a level considered sufficient to support borrower solvency.
The report comes as banks navigate recapitalisation requirements, elevated interest rates, and a cautious lending environment. S&P maintains that Nigerian banks are expected to remain resilient and profitable over the medium term, supported by improving economic conditions and gradual credit recovery.
The growing share of government securities underscores a broader challenge: while sovereign exposure provides safety in turbulent times, it limits banks’ capacity to finance productive sectors, potentially slowing job creation, investment, and overall economic diversification. As Nigeria pursues fiscal consolidation and private-sector-led growth, the balance between public and private credit allocation will remain a key focus for regulators and market participants.
