… Small lenders most hit
… analysts point at impact on GDP.
The Non-Performing Loan (NPL) ratio of Nigerian banks has risen to a five year high of 14 percent at the end of December 2016, the worst ratio recorded by banks since 2012 when the NPL ratio was just 3.7 percent. The NPL ratio more than doubled its December 2015 level of 5.3 percent.
NPL ratio indicates the average level of bad loans on the books of banks. The higher it is, the more likely that a bank will run into solvency challenges. It is a key indicator of the health of the financial industry.
The deterioration in the non-performing ratios of Nigerian banks was revealed in the Financial Stability Report of the Central Bank of Nigeria (CBN) published on its website yesterday.
The CBN blamed the deterioration in asset quality to the rising inflationary trend, negative GDP growth, and the depreciation of the naira.
Economic headwinds have adversely impacted bank borrowers, resulting in rising NPLs, which has required additional provisioning by banks, thereby reducing the capital adequacy ratio (CAR) of the banks.
Small banks categorised as banks with N500 billion or less in assets, are worse impacted, as their Capital Adequacy Ratio (CAR) stood at 3.14 percent at the end of December 2016, a situation that means they will require to raise equity immediately or risk shutting down their operations.
The decline of the CAR of small and medium banks is however not expected to weigh significantly on the banking industry because large banks, defined as banks with total assets of more than N1trn, hold a significant proportion (88.02%) of total banking industry loans and have capital average CAR in excess of 15 percent.
In order to test the resilience of the banking system to the rising risk levels however, the CBN also stated in the report, that it carried out a stress test covering 23 commercial and merchant banks in the country, to evaluate the resilience of the banks to credit, liquidity, interest rate and contagion risks.
The post-shock stress test results showed that the various categories of banks, except small banks, were resilient, at a 100 per cent increase in NPL as their CAR stood above the 10 percent regulatory threshold.
But none of the groups could sustain the impact of the most severe shock of a 200 per cent increase in NPLs, as their post-shock CARs fell below the 10 per cent minimum prudential requirement.
The impact of the severe shock scenario will result in a decline of CAR to 5.87 for the banking industry, 8.25 for the large banks with N1 trillion assets base, 7.8 for medium banks with assets of N500 billion but less than N1 trillion, and -84.50 for small banks with less than N500 billion assets base.
Ayodeji Ebo, managing director, Afrinvest Securities limited, in response to BusinessDay enquiry, suggested that a closer monitoring of the credit and approval processes of the Tier-2 banks by the CBN may be required to curtail the increasing proportion of NPLs in the banking industry.
“It is not surprising to see this significant surge in NPLs in 2016 on the back of the cocktail of challenges in the Nigerian economy, which affected credit advanced by the banks. Higher NPLs recorded by Tier-2 banks may suggest a weaker risk management framework and perhaps credit disbursement process. The Tier-1 banks have been able to restructure a significant chunk of their dollar denominated loans, to further reduce their exposure to foreign exchange risk”, Ebo said in an emailed response to BusinessDay.
Kabir Okunlola, Partner, Audit- Financial Services, KPMG Professional Services, said the implication of the worsening asset quality is that banks will significantly reduce lending to sectors considered as high risk and this will result in potentially higher rate of default because the ability of the business to generate cash flow will also be constrained. Performance of banks will also be significantly affected based on the high NPL rate.
According to Okunola, this has a tendency of negatively affecting GDP growth and recovery efforts by government, except drastic actions are taken by government and the CBN to support the sector.
For the small banks, Okunlola said they would need to raise new equity or debt capital to improve their capital adequacy levels to be able to remain in business and fund new business opportunities. Otherwise systemic risk will increase.
Analysis of banking industry total credit by sector, showed that, the Oil and Gas sector constituted 29.59 per cent of total banking industry credit, while manufacturing got 13.41 percent, general 8.71 percent, general commerce 6.25 percent, government 8.34 percent and others constituted 33.70, at end-December 2016.
Uche Uwaleke, Associate Professor and Head, Banking and Finance department, Nasarawa State University, said a high ratio of NPL to gross loans, well above the limit imposed by the monetary authority, poses a serious threat to banking system stability and the economy in general.
“The fact is that a bank with very high NPL, indicative of poor asset quality, will be risk averse and so, tend to shy away from lending to the real sector. Such a bank is more inclined to pursuing businesses that will generate quick funds, including involving in sharp practices (forex round tripping ) all in a bid to survive. Not lending to the real sector, due to its high risk nature works against the current economic recovery effort”, he said in an emailed response.
In addition, he said high NPLs erode the bottom line of banks and so, the fortunes of shareholders are negatively affected, leading to a fall in share price.
“This time around, a proactive step should be taken by the CBN and the NDIC to arrest the situation. This should include stepping up banking supervision, to ensure that they stick to credit guidelines, as well as adopting stronger prudential guidelines, which ensures, among others, that banks make adequate provision for loan losses. The apex bank should also ensure that only competent personnel with requisite training (certified professional bankers) are deployed to the credit department of banks. Given the fact that undercapitalised banks pose a threat to the country’s financial system, it is time the apex bank considered encouraging another wave of mergers and acquisitions in the banking industry”.
Johnson Chukwu, MD/CEO, Cowry Asset Management Limited, said the deterioration in the delinquency loan situation in the Nigerian banking industry could be largely attributed to the economic recession recorded in 2016. With a non-performing loans to total loans ratio of 14%, the capacity of banks to create new credit facilities has been significantly weakened. This can therefore explain why credit to the private sector by banks has been on the decline. Without access to credit, many private sector operators would find it difficult to operate their enterprises at full economic capacity, hence the slow pace of economic activities being witnessed in the country.
To address these challenges, he said the central bank should consider further tightening of its supervisory role, especially as it relates to credit administration, corporate governance, etc. The apex bank may also explore the option of settling timelines for banks whose capital have been eroded below the stipulated minimum level, to recapitalise.
HOPE MOSES-ASHIKE
