Nigerian banks are heavily exposed to the oil and gas sector, leaving investors wondering if the 54 percent slide in crude will ignite a bad loan crisis reminiscent of 2009.
The six largest Nigerian banks, FBN Holdings, Zenith Bank, Guaranty Trust Bank, United Bank for Africa, Access Bank and Stanbic IBTC, had oil sector loans equivalent to 40 percent, 17.9 percent, 28 percent, 16 percent, 24.7 percent and 19 percent of total loan book, according to Bloomberg data.
“The Nigerian sector most at risk (from oils slide), other than oil companies themselves, is the banking sector,” said Peter Leger, head of Global Frontiers at Coronation Fund Managers, an investment management firm, with 20 per cent of fund exposure to Nigeria.
“Currently, bad debts in the oil sector are low, but we don’t believe that this will persist.”
The oil and gas sector now makes up the largest component of total credit extended by Nigerian banks, with its proportion doubling to 22 percent in 2013 from 11 percent in Q1 2008.
Nigerian banks huge exposure to the sector (upstream, services and downstream) and steep decline in oil prices, is throwing up comparisons to 2008 when oil prices declined from $146/bl in July to $36/bl in December, leading to pressure on government revenues, devaluation of the naira, an equity market crash and spike in banking sector non performing loans (NPLs).
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Investment Bank Renaissance Capital says Nigerian banks have learnt a number of lessons from the last crisis and improved their risk management structures in oil and gas lending.
“Given Nigeria’s significant dependence on oil, we revisit the implications of recently weaker oil prices for Nigerian banks and conclude that this time is different to the 2009 crisis,” Adesoji Solanke, Rencap’s SSA bank analyst said in a December 01 note.
“Key sectors that led the NPL build – up during the last crisis have significantly reduced in proportion. Risk management has considerably improved between the banks and the CBN, and the nature of credit growth itself, is significantly different.”
Brent crude traded at $48.96 at 7:54 a.m. London time on the ICE Futures Europe exchange, yesterday. It averaged $99 in 2014, according to Bloomberg data.
The steep fall in prices has put pressure on oil companies’ balance sheets, making them more susceptible to default on loans extended by banks.
Shares in Afren plunged more than 65 per cent on Tuesday, after the Nigeria-focused oil group revealed it needed to raise more capital.
Afren blamed the fall in oil prices for its funding crisis, which has left it unable to meet its repayment obligations to lenders and capital expenditure requirements in Nigeria.
Rencap says a $40 per barrel oil price may trigger loan restructuring discussions between Nigerian banks and oil companies.
The Nigerian Stock Exchange Banking Index has dropped 14 percent this year, reflecting investor anxiety over bank earnings due in a couple of weeks.
The naira fell 14 percent against the dollar last year, as the slide in oil meant the CBN had fewer dollars to defend the local currency.
For Fitch ratings, the impact of the naira move is limited for banks, although FX risks are high.
“The devaluation will be a drag on capital ratios as risk-weighted assets of foreign-currency loans rise,” Fitch Ratings Ltd. said in a Dec. 17 note.
Non-performing loans in Nigeria’s banking sector will climb to between 5 percent and 10 percent by the end of 2015 from less than 3 percent now, Fitch said.
Nevertheless, the sector should avoid the bad loan crises of 2009 that necessitated a bailout from the CBN and the formation of an asset management company AMCON.
First Bank will not see a spike in NPLs this year, even if GDP growth slows as a result of lower oil prices and uncertainty from naira devaluation, said Oyewale Ariyibi, Head of Finance FBN Holdings.
Zenith Banks break-even price for its upstream exposures are about $50/bl, even though it has some hedges, while UBA says its FX loans are matched with FX revenue earners with $60-65/bl being the stress point, below which the loans are likely to get restructured by extending the tenors.
PATRICK ATUANYA
