The revelation by the Central Bank of Nigeria (CBN) that the banking industry is threatened by a whopping N1.679 trillion non-performing loans (NPLs) has generated reactions from market watchers and economic analysts, who feared the situation may worsen with economic recession. The NPLs grew by 158 per cent from N649.63 billion as at December 31, 2015 to the reported level at the end of June 2016.
The experts, who expressed no surprise at the development, blamed the worsening credit risk on the prevailing economic situation in the country, particularly as it relates to the FOREX challenges and the attendant pressure on the naira. While advocating the need for banks to adjust their business models, they advised the financial institutions to be more cautious about exposure to foreign currency.
According to the CBN in its Financial Stability Report as at June 2016, “Non-performing loans in the period under review grew by 158 per cent from N649.63 billion at end-December 2015, to N1,678.59 billion at end-June 2016. The industry wide NPL ratio rose to 11.7 per cent from 5.3 per cent, thus exceeding the prudential limit of 5.0 per cent.
Specifically, the report disclosed that, “At end-June 2016, loans to the oil and gas sector constituted 28.77 per cent of the gross loan portfolio of the banking system as credit to that sector grew to N4,511.34 billion, compared with N3,307.87 billion at end-December 2015. Loans to State Governments rose to N1,386.61 billion from N1,053.97 billion at end-December 2015, as declining revenues continued to constrain payment of salary by some states, funding of key services and execution of developmental projects.”
This, according to the report, was “despite CBN’s N338 billion special intervention scheme designed to refinance states’ debts, as well as a debt restructuring programme introduced by the Debt Management Office (DMO), which enabled states restructure their commercial loans in the preceding period. However, to prevent further financial crisis, a fresh facility of N90 billion with a 9 per cent interest rate was made available to the states.”
In fact, the CBN Financial Stability report, said, “The total exposure to the top 50 obligors stood at N5.23 trillion (33.4 per cent) of total industry credit exposure of N15.68 trillion,” and put, “Credit exposure to the dominant sectors as follows: 28.77 per cent to oil and gas sector; 12.95 per cent to manufacturing; 8.84 per cent to governments; and 8.69 per cent to general commerce.”
Going forward, the report forecast that, “Credit risk is expected to trend higher into the second half of 2016 owing to increased loan impairments resulting from the depreciation of the Naira, inability of obligors to service foreign currency-denominated loans, as well as bank exposures to the oil and gas sector.”
In his analysis, Executive Director, Corporate Finance Department of BGL Capital Ltd, Femi Ademola, noted that it was not unexpected that the banks were suffering from a huge amount of non-performing loans. According to him, “With the economic situation which has limited the capacity of borrowers to repay and the EXCHANGE RATEdepreciation, we have increased the size of foreign currency liabilities for both the banks and their obligors, the findings of the CBN are apt. What might have tempered the effects for the big banks may be their holding of assets in FOREIGN CURRENCIES which might have also benefited from the Naira depreciation.”
He pointed out that, “Some of the banks also escaped the scathing effects of the exchange rate volatilities through ingenious risk management practices which include the denominating of risk assets in Naira to customers with Naira earnings and the advance settlement of foreign liabilities before the introduction of the flexible exchange rate.
“By granting Naira loans to Naira earning customers, the banks would have effectively avoided exchange rate risk while the settlement of foreign obligations earlier prevented the increase in the value of the liabilities in Naira terms after the devaluation of the Naira.”
Ademola feared that “The combined fact that the Naira is still under pressure and that the country is in recession means that a further weakening of banks’ loans is plausible.” “They therefore need to introduce more effective risk management system and also introduce creative and proactive methods of preempting the CBN and acting to protect their balance sheet,” he advised.
Likewise, the Chief Executive Officer, Global Analytics Consulting, Tope Fasua, believed “the banks’ books are under immense pressure from the depreciation in Naira value, and their exposures to the oil and gas sector.”
Overall, he advised, “there is a need for most banks in Nigeria to tweak their business models and strategies given that they have this ‘herd mentality’ that sends them in single directions and leads to systemic risks.”
“When a bank hears that another is making a ‘kill’ in a sector, it rushes there as well. Our banks are actually commercial banks, but are competing for profitability with investment banks abroad. Since nothing bars them from doing investment banking business, they should know that they have to choose the middle of the road else we would all be in trouble.”
Fasua, who also believed the CBN interim report would serve as a wake-up call, challenged the apex bank to be bold enough to do the needful.
“We are talking of big, systemically-important banks here and nothing must happen to them. Again, our banks should be careful with foreign CURRENCY exposures – whether contracted by themselves or on behalf of their clients. In general they need to learn from recent regulatory innovations especially macro prudential frameworks that banks in developed countries have been forced to put in place. We have to get out of this boom and bust cycles, or at least ensure that they are not too extreme,” he posited.