Indications that the era of high NPL was back emerged in 2016 when the industry non-performing loan ratio rose to 12.8 percent, significantly higher than NPL ratio of 4.9 percent by the end of 2015. The industry benchmark is 5 percent. This is already having effects on the performance of the economy as by the end of 2017, credit to the private sector fell by 2.34 percent, a signal that some sub sectors were starved of funds.
While the investing public still awaits the audited reports of listed banks, information derived from the analysis of the third quarter unaudited reports of banks give us an idea of what to expect when those reports are out.
The industry NPL as at the end of the third quarter of 2017 was still above the regulatory benchmark of 5 percent. In particular, professional services recorded NPL as high as 90 percent. Others sub sectors with high NPL include general commerce, 21 percent; oil and gas, 32 percent; oil and gas upstream, 43 percent; oil and gas downstream, 18 percent; education, 20 percent , and transport, 25 percent.
What factors are responsible for high NPLs?
Through analysis, we have identified a number of factors responsible for high non-performing loans in certain sub sectors, and without addressing them, the era of high NPL may not be over soon.
- Fragile growth
This concerns the general macroeconomic environment as the growth being witnessed now depends solely on improvement in the crude oil prices, meaning that it is not driving by improvement in manufacturing activities and significant earnings from the export non-oil products. Growth in some of the sub sectors was negative as at the end of the third quarter 2017. Year-on-year, the coal mining sub sector posted negative 38 percent growth even when its entire sector, the mining and quarrying, grew by 25 percent. Also, economic activities in the entire manufacturing sector declined by 3 percent. But, the impact was more felt in oil refining whose activities declined by 45 percent just as those firms in cement manufacturing had their sub sectoral activities reduced by 5 percent. Besides, motor vehicles and assembly recorded lower economic activities to the tune of 21 percent while other manufacturing activities were down by 10 percent.
In the entire transport and storage sub sector, growth was lower by 6 percent. While there was stagnation in growth in rail, air and water, economic activities in road transport was lower by 6 percent.
Furthermore, economic activities in the telecommunications and information services fell by 6 percent. Other sub sectors with lower economic activities include financial institutions, -7 percent; insurance, -2%; professional, scientific and technical services, -1 percent; and education, -1 percent.
- Rising unemployment rate
For sub sectors such as education and general commerce, the rising unemployment rate contributed to the high NPL in those sectors. In 2017, the nation’s unemployment rate rose from 14.4 percent in the first quarter of 2017 to 18.8 percent by September of last year. Many Nigerians lost their jobs and that impaired the ability of families to pay children’s school fees, which in turn affected the capacity of private schools to service their facilities.
According to the National Bureau of Statistics (NBS), enrolments in private secondary schools in the country in 2016 declined by 512,547 students in both junior and secondary school categories. Particularly in 2015, there were 1.375 million students in the junior private secondary schools across the country but the enrolment rate fell by 24 percent or a total of 323,469 students were withdrawn from private secondary schools bringing the total enrolments to 1.051 million students in 2016. The breakdown shows that in the senior private secondary schools, enrolments declined by 17 percent to 911,561 students across the federation in 2016 from 1.1 million students in 2015. The problem was further aggravated by the inability of some state governments to pay workers’ salaries particularly in states that have large public sector base.
- High oil prices, subsidy and naira devaluation
Crude oil prices have risen by over 60 percent from $40.23 a barrel on May 10, 2016 to $64.47 a barrel on December 29,2017. This has fundamentally changed the downstream sector which is not allowed to be controlled by market forces. In effect, the landing cost of the premium motor spirit (PMS) now stands at N171 per litre. With retail price at N145/litre, it means there is a subsidy of N26 a litre on fuel. This has made subsidy arrears accumulated to the tune of N800 billion. The high NPL in the downstream is attributed to the non-payment of subsidy to petroleum marketers.
“Most of the NPLs in the oil and gas downstream sector are due to the non-payment of subsidies to petroleum marketers”, Abiola Rasak, head, Investor relations, the United Bank for Africa (UBA), said.
Findings also show that the devaluation of the naira aggravated the NPL imbroglio. This was because many deals that were contracted and which were viable at N199/$ became unprofitable at N400/$.
“At that time, investors had to look for forex partly from the CBN and parallel market where the rate of exchange was about N450/$, as a result, some projects became unprofitable, and that impaired the ability of businesses to services their facilities”, Rasak, added.
The transport sector was particularly hit by the exchange rate devaluation. The costs of vehicles and spare parts shot up as exchange rate was devalued. The immediate impact was that transporters could not service their vehicles and those who were in the process of importing new ones to expand their fleet were forced to look for more money. For instance, between 2015 and 2016, the number of number plates produced by the Federal Road Safety Commission (FRSC) fell by 27.2 percent from 573,069 to 417,093, a clear pointer to the impact of exchange rate devaluation on the importation of vehicles.
- Cost of Capital higher than return on investment
With the monetary policy rate (MPR) at 14 percent, banks could not afford to lend to customers below this level. For the better part of 2017, the average interest rate charged by banks was 27 percent. The reality is that most of the sub sectors in question have the return on capital employed lower than the cost of capital. Consequently, businesses find it difficult to service their debts as at when due.
“Those sectors having return on investment lower than the cost of capital will always have challenges servicing their facilities”, Kayode Tinuoye, head, research desk at United Capital, said.
- Governors’ reluctance to endorse letters of consent
Every loan has collateral backing it up. In the event a loan goes bad, there are some documents to perfect before such assets will be disposed of and sometimes, the process requires getting the endorsement of the state governor. This has not been forthcoming.
“As we speak now, my NPL is very high. I have been trying to get the consent of the governor to dispose of the assets used as collateral but that is not easy to get. Due to this realisation, even some profitable ventures will deliberately not service their loans’’, said a bank’s branch manager, who did want his name in print.
Implications
- Shareholders to lose dividends:
Late January, the Central Bank of Nigeria (CBN) while tacitly anticipating a high NPL era made a proactive move that would prevent dividend payment by banks with NPL above the regulatory benchmark. The circular reads thus:
“DMBs and DHs that have a Composite Risk Rating (CRR) of “High” or a Non-Performing Loan (NPL) ratio of above 10% shall not be allowed to pay dividend. Also, DMBs and DHs that meet the minimum capital adequacy ratio but have a CRR of “Above Average” or an NPL ratio of more than 5% but less than 10% shall have dividend payout ratio of not more than 30%.
“DMBs and DHs that have capital adequacy ratios of at least 3% above the minimum requirement, CRR of “Low” and NPL ratio of more than 5% but less than 10%, shall have dividend pay-out ratio of not more than 75% of profit after tax”, the CBN said in its circular.
In 2015 financial year, the banking sub sector paid N274.03 billion as dividend. However, dividend payment in 2016 declined by 43 percent to N156.41 billion. With the CBN circular, dividend payment by banks may fall further, translating to a loss of dividend income for shareholders.
- Fragile growth will remain for a while
Banks have already designated some sectors as high risk, implying that players in those sectors may not get the amount of facilities they need to break even. As a result, economic growth may remain fragile for a while.
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