Nigeria banks are girding to improve their risk management strategy as a slump in oil price and a weak naira foreshadow what may be one of the toughest years for banks to earn returns above their cost of capital.
The tough macro environment may also lead to a sharp increase in the non performing loans (NPL) of lenders in Africa largest economy.
“We bear in mind the possibility of some of the banks elongating the tenors of upstream sector loans due to the negative impact of falling oil prices on the operating cash flows of the oil and gas firms. Some of the banks also have hedge contracts in place for secondary protection,” said Tajudeen Ibrahim, analyst with Chapel Hill Denham, in an email statement to BusinessDay.
For the first quarter of the year, First Bank of Nigeria Plc (FBN) had an NPL of 3.9 percent, GTBank (3.06 percent) while Access, UBA, and Zenith recorded NPL’s of 2.1 percent, 1.6 percent and 1.7 percent respectively.
This means the average NPL of tier one lenders is 2.47 percent, based on data compiled by BusinessDay.
The ratio is expected to be between 5 percent and 10 percent by the end of 2015, Fitch Ratings, a rating agency said in a report released last year.
Lenders are struggling with a 40 percent slump in oil prices in the past year and the depreciation of the currency by the Central Bank.
These make it more difficult for oil companies which represent one-fifth of Nigerian lending to pay loans.
The Abuja based bank scrapped its bi-weekly currency auctions in February 2015 and said it would sell dollars only at the interbank near N198, a move that amounts to a de facto devaluation of Nigeria’s currency.
The naira has dropped 17 per cent against the dollar in the past six months, the most among 24 currencies tracked by Bloomberg.
The Central Bank also decided to set a unified cash reserve ratio for public- and private-sector funds at 31 percent, to improve the transmission of monetary policy.
Previously, the rate for private-sector funds was 20 percent and 75 percent for public funds. Industry players are already bemoaning the liquidity squeeze caused by the aforementioned macroeconomic challenges.
“What we clearly see is a very tough half year,” said Ladi Balogun , Chief Executive Officer, FCMB Limited, who heads the nation’s ninth largest lender.
“It is important that we restore liquidity in the foreign exchange market as quickly as possible.” said Balogun.
Some analysts see restriction in foreign exchange trading as a big risk to bank earnings.
“FX income is likely to be weaker in 2015, in our view, as the CBN’s operational controls continue to stifle interbank trading. Most banks have reduced their commission on turnover (CoT) further to 0.1 percent, which is also negative for revenue,” Renaissance Capital’s bank analyst, Adesoji Solanke said.
The first quarter 2015 results of 14 banks tracked by BusinessDay showed cumulative loans to deposit ratio increased to 66.66 percent in 2015, from 60 percent the previous year.
Loans and advances increased by 18.3 percent, to N14.31 trillion in the period under review, while deposits from customers were up by 5.50 percent to N21.37 trillion.
The cumulative net profit of 15 commercial banks spiked by 18.88 percent, to N178.13 billion, compared with the industry’s 8.51 percent earnings growth in the earlier period.
Though earnings rose, analysts say the Assets Management Corporation (AMCON) charge of 0.5 percent of assets will continue to bleed profit of banks as the agency said the levy will continue till 2019 when it is wound up.
BALA AUGIE
