Nigeria’s financial system is solid and has returned to growth and profitability as a result of the intervention by the Asset Management Corporation of Nigeria (AMCON). This is in spite of fears by rating agency Standard and Poor’s (S & P) that industry-wide Non-Performing Loans (NPLs) may spike in about two years.
“A crisis in the banking system is unlikely going forward. A lot of things will have to go wrong for us to start buying NPLs from the banks again and I don’t see that happening,” Mustapha Chike-Obi, AMCON chief executive, said yesterday in response to BusinessDay questions at a press event in Lagos.
AMCON is a unique institution that combines the buying of bank NPLs with the restructuring or refinancing of performing loans and the recapitalisation of troubled financial institutions.
Data from AMCON shows that it spent N5.6 trillion ($35.5 billion) on its mandate giving banks more capacity to lend to the private sector.
The intervention by AMCON helped to reduce the banking industry NPL ratios to an average of about 5 percent in 2013 from over 30 percent in 2010.
Banks have also resumed lending, with some like UBA planning to increase loans by as much as 40 percent this year (same as 2013) to fund oil, power and manufacturing projects, according to Phillips Oduoza, UBA chief executive officer, in an interview with BusinessDay.
The push by lenders to create risk assets and expand their loan books is a tight rope to walk, however, considering they would have to ramp up lending while keeping bad loans from ballooning, according to Standard & Poor’s.
“The banking industry may see credit issues emerge fairly quickly when loans mature in about two years, as a result of the short credit cycle and volatility in asset quality. As banks start lending again to risky levels, some banks may lend beyond their ability,” said Samira Mensah, associate director, financial institutions ratings, S & P, in an interview with BusinessDay.
S & P revised its outlook on its five rated Nigerian financial institutions (Access Bank, First Bank, Stanbic IBTC, GTB and Zenith Bank) to negative from stable in April 2014 due to its earlier revised outlook on the sovereign (Nigeria) to reflect heightened political and institutional risks.
Lenders are increasing risk assets as they seek to replace profits lost to higher cash reserve requirements (CRR), tighter monetary policy, regulation aimed at lowering fees and increasing competition, and AMCON’s resolution fund levy.
Pre-tax earnings for the 16 commercial banks which have released Full Year 2013 results fell by 1 percent to N515 billion, compared with the industry’s triple-digit earnings growth rate in 2012.
Lenders in 2013 started contributing 0.5 percent of their total assets to the AMCON sinking fund set up to help defray some of the costs of the banking sector resolution. Nigerian banks which had total assets of N22.64 trillion in 2013 may have collectively paid N113.2 billion last year into the fund, which is domiciled at the Central Bank of Nigeria (CBN).
The CBN under its new governor, Godwin Emefiele, has signalled it may begin to cut benchmark interest rates held at a record high of 12 percent since October 2011, which may cut into bank profits if yields on government securities adjust lower.
Emefiele is trying to boost growth and employment as the 7.3 percent economic expansion forecast by the International Monetary Fund (IMF) for 2014 is below double-digit potential output, according to economists.
AMCON plans to sell at least two of the three bridged banks (Enterprise and Mainstreet) by mid-September 2014, Kayode Lambo, AMCON head of corporate communications, said at the same event, adding that at least 25 people/institutions have so far expressed interest in purchasing Mainstreet Bank.
The NSE Banking Index, which tracks Nigeria’s 10 biggest banks by market value, has advanced 0.3 percent this year compared with the 0.47 percent rise in the Nigerian Stock Exchange All-Share Index.
PATRICK ATUANYA & HOPE MOSES-ASHIKE
