Caught in the thicket, Nigerian banks agonise over oil exposures, currency risk

By Moses Obajemu

• FCMB restructures 50%‭  ‬loan exposures‭ ‬

Nigerian banks are waking up the morning after to find that they are caught in the thicket and are agonising over exposures to oil and gas sector and a huge threat to the local currency, the naira. Indeed, some of them already have their noses cut by falling oil prices and the threat it poses to the stability of the naira.

Those of them that are big players in the oil and gas financing appear to already have their fingers burnt as oil prices have fallen below the $60 per barrel price when they structured financing for some players in the industry.

Now, the oil companies have no where to sell their crude as demand is almost zero. Coupled with low demand, prices are low, which may not even cover their cost of production.

Oil prices ranged between $21 and $30 per barrel at the weekend, a far cry from the wishes of both the oil and gas firms and the banks.

First City Monument Bank Plc (FCMB), which is caught in the web of huge oil and gas exposure, plans to restructure half of its loans after plunging oil prices, the coronavirus lockdown and a naira devaluation hindered the ability of the bank’s clients to repay their debt.

Credit facilities across industries ranging from oil and gas to small- and medium-sized enterprises will be reorganized, the bank said in a presentation. New terms will include a six-to 12-month moratorium on principal debt repayments and an extension on loan maturities of up to two years.

The measures by FCMB came after impairment charges surged 61 percent to N3.7 billion ($9.6 million) in the first quarter, according to a filing to the Nigerian Stock Exchange. Loans in the period rose seven percent to N764.3 billion from a year earlier.

The bank plans to increase impairments to offset losses in unhedged upstream assets in the oil and gas industry, it said. About 37 percent of the bank’s customers have foreign-currency loans and earn income in naira, so the lender will convert those into the local currency, FCMB said.

Banks which are not so highly exposed to the oil and gas industry have currency risk to contend with. Those of them which borrowed from foreign creditors are having to pay with more naira than they did in the pre-Covid 19 era.

The naira is falling as the foreign reserves get eroded and the Central Bank of Nigeria does not have enough forex to service demand. Thus, Nigerian banks now pay with more dollars for credit granted them in the past.

Most banks have their crude risks hedged at $40-$50 a barrel, according to ARM Investment Managers in Lagos, which means provisions would need to be raised if prices remain at current low levels. A naira devaluation following the one in March could cause dollar loans to soar, which would have to be covered by naira earnings, while also adding to the cost of capital.

“The risk to earnings is higher if oil prices are less than $30 per barrel over a prolonged period of time — up to six months in our opinion,” said Aderonke Akinsola, an analyst at Chapel Hill Dunham in Lagos. “We cannot rule out the possibility that some banks may not survive that.”