Efforts to establish a specialised company to acquire Nigerian banks’ non-performing loans (NPLs) will, if successful, ease mounting asset-quality problems, says Fitch Ratings in a statement released yesterday.
The Central Bank of Nigeria (CBN) and Nigeria Deposit Insurance Corporation (NDIC) have set up a committee to discuss the plan, according to sources.
“Setting up an asset management company (AMCON2) to acquire NPLs would in our view, be a more significant and credit-positive measure. If successful, and depending on transfer pricing agreed, it could result in real improvement in the banking sector’s asset quality. Sectors experiencing difficulties include oil and gas, utilities, manufacturing and trading,” Fitch said in the statement.
The operating environment for banks is becoming increasingly difficult as recession; weak oil prices and exchange rate pressure combine to make it more difficult for borrowers to service their loans.
NPLs in the sector are increasing rapidly, reaching 11.7 percent of gross loans at end-June 2016 from 5.3 percent as at end-2015, according to data from the CBN.
Nigerian banks’ balance sheets are highly dollarised, with foreign-currency-denominated loans constituting around 50 percent of total loans, as of the end of June 2016 largely on the back of loans to indigenous oil and gas firms.
Ten years ago, indigenous Nigerian oil and gas firms produced less than 50,000 barrels per day (bpd), but today account for 12 percent of estimated 2.2 million bpd production and 20 percent of Nigeria’s oil and gas reserves, according to Ladi Bada, Managing Director/CEO, Shoreline Natural Resources Ltd.
The banks’ exposure to the oil and gas industry is substantial at around 30 percent of total loans, of which about one-third is to the upstream segment.
Guaranty Trust Bank and FBN Holdings have the highest proportion of loans to the oil and gas sector of 40 percent and 35 percent respectively and large foreign-currency loan exposures, according to Moody’s Investors Service.
Moody’s expects non-performing loans (NPLs) to increase to around 12 percent over the next 12 months, compared to the 5 percent recorded as of December 2015.
Declining oil prices over the last two years have led to a corresponding decline in the revenues of Nigerian oil and gas firms, making it more difficult for them to service their predominantly foreign-currency borrowings.
Oil may climb to $60 a barrel for the first time in almost a year and a half, after Russia and other unaffiliated nations joined an OPEC pledge to reduce production and Saudi Arabia surprised the market by saying it will cut more than previously agreed.
This should be positive for Nigerian lenders who are heavily exposed to the troubled oil and gas sector and oil companies with restructured loans, such as Seplat Petroleum Development Company.
“The breakeven oil price for most of the restructured loans for the upstream is $30 per barrel, meaning current oil prices will support the loans going forward,” Akin Majekodunmi, Senior Analyst, Financial Institutions Group at Moody’s said.
The restructuring has mainly been by increasing loan tenors, allowing struggling clients to pay based on their cash flow capacity and converting some amortising loans into bullet loans.
The Nigerian authorities have allowed banks to speed up the write-off of fully reserved NPLs since July 2016.
This is intended to encourage banks to clean up their balance sheets and help them comply with the 5 percent NPL/total loans ratio the central bank uses as guidance for the banks.
Fitch-rated Nigerian banks’ NPLs at end-June 2016 were reserved at 62 percent and its ratings already factor in an assessment of loan loss cover adequacy.
AMCON2 would follow AMCON, established in 2010 and funded by the issuance of Federal Government zero-coupon bonds, the CBN, and later by a levy on banks’ assets.
AMCON removed NPLs from the banking sector, making banks better positioned to lend to the real economy.
AMCON continues to operate, having recovered 56 percent of the value of total loans acquired from the banks. It also acquired failed banks and stakes in failed banks.
Funding of AMCON2 might prove difficult however as reports suggest that the government intends it should be funded by the private sector, which may balk at acquiring NPLs at a time of heightened economic difficulty.
PATRICK ATUANYA
