Will rising oil prices, improved public sector salary payments stem the tide of high NPLs in banks?

The surge in non-performing loans among Nigerian financial institutions is yet to abate. However, there are speculations by market watchers that improved oil prices and payments of salary to workers in the public sector are expected to significantly reduce the risk exposure in Nigerian banks.

According to data, Nigerian banks’ non-performing loans are highly concentrated in the oil and gas sectors, with pockets of smaller ones in the retail segment of the market due to defaults by oil companies on falling oil prices and default by public sector workers due to non-payment of salaries to service their personal loans.

However, the recent surge in oil prices to over $80 per barrel is seen as a boon to both oil and gas companies and public service officials since increased revenues would make companies meet their loan obligations, just as the civil servants would be paid promptly to service their loans.

But there is an underlying if. Whether these sectoral improvement will deliver expected results is however debatable as high-interest rates may continue to serve as a deterrent to individual loans’ repayment.

Banks are expected to keep the ratio of non-performing loans to total loans at a regulatory threshold of five percent.
The Central Bank of Nigeria (CBN) expects that the commercial banks’ ability to provide capital and stimulate investment for economic growth is not threatened, hence the requirement.

An NPL is the sum of borrowed money of which a debtor has not been able to meet up in scheduled payments for at least 90 days, and is either in default or close to being in default. Once a loan is non-performing, the odds that it will be repaid in full are considered to be substantially lower, while the NPL ratio is the amount of NPLs over total loans, usually expressed as a percentage.

A business a.m. investigation on NPL ratios of 12 Nigerian banks show that the number of banks, which have violated the regulatory requirement has increased.

As at half year 2017, six banks were found to be operating outside the bands of the NPL threshold. However, by year end 2017, two more banks had joined to make it eight that are operating outside the confines of the regulatory requirement.

A review of the financial statements of these institutions sheds more light on the positions of each bank. Majorly, NPLs grew across the industry in the year ended 2017 on one single exposure to the telecommunications company, Etisalat, which has since become 9Mobile following the pull out of the United Arab Emirates based company from Nigeria.

Zenith Bank was one of the six banks within the regulatory NPL ratio band as at HY2017. Although the bank’s exposure to the $1.2 billion Etisalat loan in the tune of $262 million (N80 billion) increased its NPL ratio, it was still within the regulatory requirements with a ratio of 4.7 percent as at year-end 2017.

Guaranty Trust Bank declined in terms of assets quality as NPL ratio increased to 7.7 percent in December 2017 from 3.7 percent in December 2016 largely as a result of classification of a single exposure within the Nigerian Telecommunications Industry, says Segun Agabje, the bank’s CEO.

He noted that non-performing loans are expected to moderate to 4.6 percent, (which is below regulatory threshold), upon exclusion of the exposure from the NPL ratio computation. Overall, asset quality remains stable with adequate coverage of 119.6 percent, Agabje said.

On the part of FBN Holdings, NPL ratios reduced albeit marginally. The financial statements of the bank affirmed that the bank had not recorded a full resolution of its non-performing loans (NPL). The bank, however, noted that they have made significant progress in dealing with a number of defaulting names and more fundamentally, ensured a strong asset quality from recent credits. As a result, NPL for the period declined from 24.4 percent in 2016 to 22.8 percent in 2017.

For Union Bank, NPLs spiked to 19.8 percent as at December 2017 from 9.60 percent in December 2016. The bank’s credit committee, which oversees the credit rating of the counter-party, plays a fundamental role in final credit decisions as well as in the terms offered for successful loan applications. The bank in its report, however, noted: “the Group employs a robust credit rating system based on international best practices (including Basel II recommendations) in the determination of the Obligor and Facility risks and thus allows the Bank to maintain its asset quality at a desired level.”

In spite of a five percentage points spike in Diamond Bank’s NPL ratio, Chris Ogbechie, chairman, board of directors, explained that the bank’s provisioning for year ended 2017 is below the 2016 level. He said this was a clear indication that the bank has turned the corner from one of the major factors hindering profitability.

He said: “Precisely, net impairment loss on financial assets reduced by N185 million (0.3%) to N56 billion in 2017. This was achieved in a year where industry NPLs averaged c.14 percent.”

Ecobank Transnational Incorporation’s (ETI) NPLs increased 12 percent from $948 million in December 2016 to $1.060 billion in December 2017. The bank’s financials revealed that “at regional level, Nigeria recorded the highest level of NPLs, accounting for 37 percent (29% in December 2016) of total NPLs, followed by CESA and UEMOA, which accounted for 28 percent (22% in December 2016) and 19 percent (38% in December 2016) of total NPLs, respectively.

NPL ratio for ETI also stood at 10.7 percent in December 2017 as against 9.60 percent as at December 2016. Emmanuel Ikazoboh, group chairman, Ecobank Group agreed the NPLs were high but explained control measures are being put in place to mitigate the rising risks.

“At the end of 2017, the non-performing loan ratio stood at 10.7 percent, which we consider high. As explained last year, lapses in internal credit control across the group, coupled with the effects of Nigeria’s recession, had a negative impact on Ecobank’s credit quality. We have diligently addressed these issues, resulting in specific provisions of approximately $1.6 billion over the past two years.’ Ikazoboh said.

First City Monument Bank is one of the four banks operating within regulatory threshold of the CBN. FCMB reported an NPL ratio of 4.9 percent in December 2017, compared to 3.7 percent in December 2016. The bank in its financials noted that it would continue to intensify efforts in proactive loan monitoring and portfolio review of risk assets.

However, Wema, Fidelity and Sterling saw their NPLs ratios improve in the period under review.

Wema and Sterling bank’s NPL ratios in the period under review commendably dropped to 3.5 and 6.2 percent from 5.07 and 9.90 percent respectively. According to Asue Ighodalo, Sterling Bank’s chairman, the bank made significant improvement in asset quality as reflected in the reduction in non-performing loans by 18.8 percent to N38.5 billion. This resulted in a 370 basis points decline in the proportion of non-performing loans to gross loans (NPL ratio) to 6.2 percent from 9.9 percent in 2016.

The overall quality of Fidelity bank’s risk assets also improved with NPL Ratio at 6.4 percent against the 6.6 percent recorded in the 2016 financial year.

It is instructive to note that although increasing NPL’s and its ratio is a warning signal, a performing loan, however, will provide a bank with the interest income it needs to make a profit and extend new loans for greater development and provide faster stimulants for economic recovery.

However, financial activities meant to speed up economic growth would remain a mirage if growing NPLs are not dealt with.

Although concerted caution is being taken by these financial institutions as shown in their books, the growing NPL of financial institutions across the country still serves as a snag in the wheels of development as SMEs and start-ups would be starved of funds.