Banks’ assets have depreciated in the last two years, with provisions for Non Performing Loans (NPLs) hitting N856.9 billion, a financial market report has said.
The report by the investment and research firm Afrinvest West Africa Plc was released yesterday. It said provisioning for the NPLs, which rose 3.1 times from N280.4 billion in December 2014 to N856.9 billion last August, trimmed qualifying capital for mid to small-sized banks. The high concentration of forex denominated loans has nominally increased risk weighted assets following pressure on forex rate, it said.
The report titled: “The Nigerian Economy and Financial Market 2016 Review and 2017 Outlook: Reform or be Relegated”, attributed the rise in NPL to foreign exchange (forex) crisis, low oil prices, which fell below trend production volumes and tight monetary policy, which plunged the economy into recession while the asset quality of banks has sharply deteriorated.
These, the report said, were at the heart of a slow-burning solvency and liquidity crisis in the financial sector.
It said the NPL ratio increased from 2.9 per cent in 2014 to 11.7 per cent as of June 2016, with the forecast it could rise to 12.1 per cent as at December 2016. The pressured portfolios of the banks include upstream oil and gas, general commerce, manufacturing and power sectors, which account for 48.1 per cent of total industry loan book.
The report also said FBN Holdings, Diamond Bank Plc, Heritage Bank Limited, First City Monument Bank Limited, Union Bank of Nigeria Plc, Unity Bank of Nigeria Plc and Skye Bank Plc would either require fresh capital or aggressively capitalise their earnings to stay within prudential limits in the next one year.
The Capital Adequacy Ratio (CAR) for banks that operate in Nigeria alone is 10 per cent, and is 15 per cent for lenders with offshore subsidiaries and 16 per cent for Systematically Important Banks (SIBs).
Central Bank of Nigeria (CBN) spokesman Isaac Okorafor said he was yet to receive the report and would not comment. A spokesman of one of the banks said his lender would not source any fresh capital, but would rather capitalize its earnings. He pleaded not to be named.
The report said: “In our estimation, seven banks- FBN Holdings, Diamond Bank of Nigeria Plc, Heritage Bank Limited, Unity Bank Plc, First City Monument Bank Limited, Skye Bank Plc – would need to raise capital or aggressively capitalise earnings to stay within prudential limits in the next one year.”
According to the report, access to capital market for debt and equity financing remains tight due to the weak macroeconomic backdrop and investor sentiment even as profitability going forward will also be pressured as banks would be required to adopt International Financial Reporting Standards (IFRS) in reporting impairment charges from 2018.
It said the new accounting policy is much stiffer in that it forces early recognition of impairments. “We forecast NPL ratio to stay in double-digit in 2017 as the macro pressures persist whilst the delayed but certain adjustment of the currency in 2017 will further increase provisioning cost,” it said.
It said there were suggestions that regulators were considering another Asset Management Corporation of Nigeria (AMCON)-type bailout to acquire stressed assets, “but we doubt the feasibility of this, given the stretched finances of the federal government, already encumbered balance sheet of the CBN and the public backlash another bailout will generate”.
The report said the impact of the above factors had put pressure on the CAR of banks across all Tiers with four lenders currently below or at threshold of regulatory limit.
“To create a soft landing for banks and stabilise the financial system, the Central Bank of Nigeria (CBN) recently issued a regulatory guideline to allow a one-off write-off of already provisioned loans before the mandated one-year period. The CBN also took over a Tier-2 lender, Skye Bank, which fell four percentage points below the mandated CAR limit and below liquidity ratio guidelines.”
“The management of the bank was changed while the CBN injected N100 billion of liquidity to prevent a run on the bank. We also understand that a sizeable portion of the bank’s oil and gas loans have been restructured and the quality of the portfolio should significantly improve in subsequent months as oil prices rally,” the report said.
Continuing, it said despite the above situation, it did not believe that risk to financial system stability has materially reduced on account of the level of provisioning, both for restructured and un-restructured assets, is not adequate with Loan Loss Reserve/Non-Performing Loan ratio currently below 50 per cent and at a six-year low.
The report said Nigeria’s business cycle would be highly dependent on the ability of policy makers to deliver incremental oil output in 2017, restore macroeconomic stability by rebuilding confidence in monetary policy and the administrative side of the forex market structure as well as showing commitments to structural reforms.
Afrinvest believes that activities in the Nigerian economy in 2017 will be broadly dependent on the Federal Government’s resolve to implement tough but necessary structural reforms in order to recalibrate the economy towards a path of recovery and rebuild confidence in monetary policy.
Said the report: “We note that oil prices which had hitherto overwhelmingly driven Nigeria’s business cycle will play a reduced role in the medium term. Despite the recent OPEC/Non-OPEC deal to cut production volumes, the balance of oil resources (between conventional low cost-drillers in OPEC countries and increasingly resilient and efficient shale producers) as well as diversification into clean energy in advanced countries suggests that structurally, the era of more than $80.00/b oil is over.”
It said the short to medium term outlook would be highly dependent on the ability of policy makers to deliver incremental oil output in 2017 while also reviewing the current structure of the currency market. “The 2017 budget, which is broadly optimistic, given current macroeconomic realities, will require the focused commitment of both the Executive and Legislative arms of government in order to get passed into law so that timely implementation can begin to achieve the objective of stimulating economic recovery through increased infrastructure spending,” Afrinvest said.