Oil And Agriculture Increase Climate Vulnerability Of Nigerian Banks — Fitch

Nigerian banks are particularly exposed to climate-related risks as significant parts of their loan books are exposed to oil, gas and agriculture, sectors that face profit pressure from global decarbonisation and increasing extreme weather, Fitch Ratings has warned.

Banks are facing increasing climate risk that could hit asset quality and credit profiles over the coming decades, the rating agency said.

Fitch Ratings said in a new report, “African Banks Have Structural Exposure to Climate Risk; Credit Implications Evolving,” that while the immediate impact on African lenders remains manageable, both transition and physical risks will rise over time, presenting “significant challenges for banking systems across the continent.”

Fitch highlighted Nigeria’s heavy dependence on hydrocarbons and agriculture as a key vulnerability.

A large portion of Nigerian banks’ loan books is exposed to sectors that could be harmed by global decarbonization policies, technological shifts and changing investor preferences.

“Oil and gas, mining and heavy industry remain core activities in a number of countries, with Nigerian banks being among the most exposed due to the country’s dependence on hydrocarbons and agriculture,” Fitch said.

The agency warned that tougher international climate commitments could hurt profitability in carbon-intensive industries and leave some assets “stranded,” raising credit risks for lenders with concentrated exposures.

Agriculture borrowers are also contending with increased uncertainty as floods, droughts and other extreme weather events become more frequent and severe.

These developments could weaken borrowers’ repayment capacity, reduce collateral values and lead to higher credit losses across the banking sector, Fitch said.

The report also flagged an increase in regulatory focus on climate-related policy across Africa. Nigeria is building carbon-pricing and carbon-market systems as part of its broader climate commitments.

While these measures support sustainability goals, they could raise operating costs for businesses in affected sectors, with potential knock-on effects for banks through weaker borrower performance, Fitch said.

African banks are generally exposed to elevated transition risks given their exposure to industries vulnerable to emissions-reduction policies and technological disruption. While transition risks overshadow the near-term outlook, Fitch expects physical climate risks to grow in prominence by 2050, as rising temperatures, flooding, droughts and other hazards weigh on economic growth.

West Africa is listed as among the most vulnerable regions and Fitch said the indirect effects for Nigeria could be significant.

Climate shocks can weaken household incomes, reduce corporate profitability and increase macroeconomic volatility, which could translate into higher credit risks for banks.

Collateral related to real estate and agriculture could also decline in value over time, increasing loan-to-value ratios and impairment charges.

Fitch said it estimates Nigeria could score between 50-55 on its Climate Vulnerability Signals (Climate.VS) framework by 2050, putting it in a similar bracket as Ghana, Egypt, Kenya and South Africa.

“While there are risks, there are also opportunities for banks that act early,” Fitch said. The report highlighted growth in green finance, sustainable lending and climate-focused investment products as potential routes to diversification and resilience.

It recommended that banks incorporate climate considerations into their risk management frameworks, diversify sector exposures, and engage customers on low-carbon transition strategies.

Fitch also pointed to increasing regulatory scrutiny. The Central Bank of Nigeria has initiated the development of frameworks to improve climate-risk classification, governance and transparency in the financial sector. The agency warned that banks that fail to adapt may face reputational damage, reduced investor confidence and funding constraints as global capital shifts toward institutions with stronger sustainability credentials.

Nigeria is walking a tightrope between growth and climate commitments. The country, which is heavily dependent on oil and gas revenues and has large natural gas reserves, has also committed to emissions reductions under the Paris Agreement.

Fitch concluded that the transition is likely to be gradual but added that banks must start preparing now.

“Institutions that are able to effectively manage climate risks and capitalise on emerging green finance opportunities are expected to be better positioned to remain resilient and support sustainable economic growth,” the report said.

Recall that Fitch last month warned that Nigeria’s proposed $5 billion Total Return Swap (TRS) with First Abu Dhabi Bank could mask sovereign debt risks and complicate any future debt restructuring.

TRSs offer cheaper financing and diversify funding sources, but also entail “significant structural and transparency risks,” Fitch said in the report Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks: Balancing Transparency and Recovery Risks Against Financing Flexibility.