Banks’ Loan Growth Slows On Rising Bad Debts | Independent Newspapers Limited
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Banks’ Loan Growth Slows On Rising Bad Debts

Posted: Mar 24, 2016 at 3:00 am   /   by   /   comments (0)


Nigerian banks may cut back credit to the local economy as non-performing loans (NPLs) rise to levels before the risk-based audit of the banks embarked upon by the Sanusi Lamido Sanusi-led Central Bank of Nigeria (CBN).

Figures obtained by Independent reveal that banks’ non-performing loans as a percentage of total loans rose sporadically just within one year after the exit of the emir of Kano as the apex bank chief.

The figures obtained from the World Bank indicate that NPL fell from 5.8% in 2011 to 3.7% in 2012. It further fell to 3.4% in 2013 then to 3.0% in 2014.

However, between 2014 and 2015, NPL levels shot up to 5.2%, midway to the 10% tolerable level as specified by the CBN prudential guidelines. Fallout of this development is that the banks may have just gone to sleep in their risk management functions.

According to the World Bank, “Bank non-performing loans to total gross loans are the value of non-performing loans divided by the total value of the loan portfolio (including non-performing loans before the deduction of specific loan-loss provisions). The loans amount recorded as non-performing should be the gross value of the loan as recorded on the balance sheet, not just the amount that is overdue.”

Independent gathered that most of the banks are wary to grow their risk assets, despite a surfeit of liquidity because of growing non-performing loans especially in exposures to the oil and gas sector.

The monetary policy meeting (MPC), which held early this week specifically, stated that deposit money banks were reluctant to grant new credit because of rising non-performing loans (NPLs), mainly in the oil sector, amongst other reasons.

The MPC also stated that the banks equally hedged on lending in the interbank market as rates in the market remain flat.

“Average inter-bank call and OBB rates, which stood at 0.5 and 2.77 percent on 25 January 2016, closed at 4.00 and 5.00 percent, respectively, on March 9, 2016.

“Between January 25th and end-February 2015, interbank call and OBB rates averaged 1.43 and 2.68 percent, respectively,” it stated.

The committee attributed its rate rise to the liquidity surfeit in the banking system.

The heavy exposure to the oil and gas sector by banks, which constitutes 70 percent of government revenues and 90 percent of all exports, is a big burden most banks are contending with. For example, a tier one bank is reported to have exposure of over $400 million to an indigenous oil firm.

Dr. Ogho Okiti, an economist and analyst, said the Central Bank of Nigeria (CBN) should be credited for the low growth in non-performing loans that occurred in 2015.

“A growth of NPLs from 3.0% to 5.2% is below expectations given the dramatic changes in Nigeria’s economic outlook and performance, he said, adding that “in the period of 2009 – 2010 NPLs rose dramatically and led to a near collapse of the banking sector following fall in oil prices. This time, we have had more dramatic fall in oil prices, worse economic conditions, and severe fall in economic growth. Given the growing economic uncertainty and increasing financial insecurity, this NPL growth is modest and the CBN should be commended for a robust surveillance.”

“Nigeria’s banking system responded very well to the crisis of 2009 – 2010, and have been largely insulated from the current economic crisis,” he pointed out.

According to Oxford Analytica, a London-based consulting firm, Nigerian banks allocated 23.8 percent of their loans to the oil and gas sector in the first half of 2015, up from 10 percent in the previous year. The three largest banks in asset terms – Zenith Bank, Guaranty Trust Bank and First Bank of Nigeria – grew their oil and gas portfolios by 101 percent, 47 percent, and 37 percent, respectively, in 2014.

The consulting firm specifically projected that non-performing loans will spike in 2016.

“With this level of exposure to the oil and gas sector, which is facing a sustained period of low oil prices, non-performing loans in Nigerian banks may reach alarming proportions this year,” it said, adding that this may significantly lower banks’ revenues and profit going forward.

Bad as the situation looks, Oxford Analytical doubt whether the banks will be honest enough to disclose the full extent of their loan losses.

Most banks are expecting increased focus on asset quality this year, while pursuing an increase in loans in line with their outlook.

Ratings agency Moody’s said this week it expected non-performing loans (NPLs) to rise above five percent but remain below 10 percent over the next two years as the weaker naira increases the risk of dollar loans and suppresses bank capital.

NPLs in Nigeria’s banking sector rose to 4.65 percent at the end of June and closed 5.2% due to a fall in asset quality following devaluation of the naira and amid rising inflation, according to reports.