Nigeria’s macro risks, concentration worsen lenders’ asset quality as top five banks account for 47% of impaired credits

The intense weakening of the macroeconomic fundamentals against the backdrop of lower crude oil prices – Nigeria’s major revenue source – and the unorthodox demand management in the foreign exchange market in the past two years, have contributed negatively to the asset quality of banks, say Agusto & Co, Nigeria’s foremost rating and research firm.

In a banking industry report, Agusto & Co. states that the top five Nigerian banks collectively held 47 percent of the industry’s impaired loans, that the impaired loans were mainly in the oil and gas and transport and communication sectors, which account for 37 percent and 11 percent respectively of the industry’s total classified loans.

The report specifically noted that performance of the Nigerian banking industry is largely dependent on the macroeconomic environment, particularly the performance of the top five banks, which account for 57 percent of the Industry’s total assets. It added that the macro risks resulted in the banking industry’s asset quality deteriorating significantly.

The top five banks, though the largest in asset size and earnings, were not spared in the asset quality issues.

In the report, the rating agency indicated that in the oil and gas space, the top five banks account for 60 percent of the loans disbursed to the sector, which heightens concentration risks.

“On a segment basis, the top five banks have granted over 66 percent of the banking industry’s total exposure to the oil & gas (upstream), 64 percent of total exposure to oil & gas (midstream) and 73 percent of the total loans granted to the oil & gas (downstream).

Analysts call rate retention as Nigeria central bank seen focused on reining in inflation amid naira woes

Nigeria’s e-commerce market to peak $50bn in a decade as expansion seen beyond retail transactions

On an average, each of the top five banks has disbursed over 500 billion naira to the oil & gas sector. This makes them vulnerable to the financial performance of this sector, which has been enfeebled by global circumstances,” the report noted.

Equally, of the impaired loans to oil and gas sector (c.37%), the top five banks account for 77 percent of these impaired loans. These loans largely granted in foreign currencies were further exacerbated by the volatility of the domestic currency.

There have been arguments that given the sheer size of the top five banks’ loan book, they will continue to account for a sizeable chunk of the banking industry’s impaired loans especially in periods of weak macroeconomic fundamentals.

“However, we believe that these industry leaders need to strengthen risk management framework particularly in the areas of concentration risk, early warning signals, and enhanced oversight governance.

The undue concentration to oil and gas could become the Achilles heel for the top five banks,” the report said.

To mitigate against these risks, Nigerian banks were advised on the need to adopt time-tested values, including an advice given in 1863 by Hugh McCullock, then comptroller of the currency and later secretary of the treasury in the US, in a letter addressed to banks.

In the letter, he said, “Distribute your loans rather than concentrate them in a few hands”. Concentration risks in oil and gas (downstream) and margins trading (equities) led to the 2008/2009 banking crisis in Nigeria, which resulted in the nationalisation of some of the most vulnerable institutions and the bailout of the industry.

Beyond, concentration risks, Hugh Mc Cullock also offered sage advice on the basics of lending. He said in that letter that, “let no loans be made that are not secured beyond a reasonable contingency. Do nothing to foster and encourage speculation. Give facilities only to legitimate and prudent transactions.”

According to Agusto & Co Mc Cullock’s words are true for all time and imbibing them would help Nigerian banks avoid the next bubble just before it pops.