H1 Financials: When Headwinds Hit Profit | Independent Newspapers Limited
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Banking & Finance

H1 Financials: When Headwinds Hit Profit

Posted: Aug 1, 2016 at 11:42 am   /   by   /   comments (0)

Bamidele Ogunwusi


While commercial banks in the country are in for a tough half year due to rising bad loans and the economic downturn, more troubles seem to await chief executive officers and chairmen of banks over their failure to publish financial statements within the regulatory period ended June 30, 2016.

The Central Bank of Nigeria (CBN) had in its recently released monetary, credit, foreign trade and exchange guidelines for fiscal years 2016/2017, threatened to sack CEOs and chairmen of banks who fail to publish their financial statements within the regulatory period.

Findings show that the deadline for quoted companies to submit their audited report and accounts for this period has expired, even as strong indications emerged that the Nigerian Stock Exchange (NSE) may sanction banks and other listed companies over non-compliance in exception of Wema Bank.

Already, Guaranty Trust Bank and Access Bank have appealed to the NSE to extend the deadline for the submission of their financial results for the first half of 2016. Both banks made their position known in separate letters to the Exchange.

Most quoted companies, including banks, major manufacturers, oil and gas companies, breweries and cement companies use the 12-month Gregorian calendar year as their business year, which terminates on December 31.

NSE’s regulatory filing calendar indicates that the deadline for submission of annual report for companies with Gregorian calendar business year ended June 30 while the one month extension is expected to end July 31, 2016.

However, the problem of the banks is hydra-headed. The economy at present is faced with weakening oil sector, which has seen the reduction in earnings.

This, coupled with the implementation of the Treasury Single Account (TSA), has reduced drastically the take home of many banks.

In addition, the foreign exchange crisis, inflation, abolition of Commissions on Turnover (COT) and other economic headwinds have dragged the banks into unplanned financial crisis. For one, the industry is heavily exposed to the oil and gas sector, which contributes over 70 per cent of government revenue and 90 per cent of all exports.

With the fall in global oil prices by nearly 60 per cent from $115 per barrel to about $44 per barrel in the past 23 months, thus resulting in lower government revenues, and thereby decreasing banks’ takes. With a high level of exposure to the oil and gas sector, which unfortunately is facing a sustained period of low oil prices, non-performing loans in Nigerian banks have reached alarming proportions. This has continued to significantly lower banks’ revenue and profits especially in 2016.

Meanwhile, findings have shown that rising bad loans due to the slow growth in the economy will drag a good number of Nigerian banks to record low profits when their financial results for the second quarter are released any time from now.

As a result, 13 out of the 15 banks whose shares are quoted on the NSE may post a combined 15 per cent drop in their second quarter financial reports, according to top bank executives familiar with the situation.

In the first quarter of 2016, 13 out of the 15 banks whose shares are quoted on the NSE posted a combined PBT of N135.36 billion, compared to N148 billion in the corresponding period of last year. This represents eight per cent decline.

Similarly, the 13 banks posted profits after tax of N116.6 billion in the first quarter of 2016, compared to N126.4 billion in the first quarter of 2015.

The affected banks are Access Bank Plc, Guaranty Trust Bank Plc, Zenith Bank Plc, United Bank for Africa Plc, Diamond Bank Plc, Ecobank Transnational Incorporated Plc, Fidelity Bank Plc, First City Monument Bank Limited, First Bank of Nigeria Limited, Union Bank of Nigeria Plc and Sterling Bank Plc.

Besides, Wema Bank that has submitted its half year result, others will start releasing their second quarter financial results at the Exchange soon to escape the regulators’ hammer. Some, however, may delay theirs for some time.

Top bank executives have hinted that many of the nation’s lenders would post record low profits in their second quarter financial results due to rising bad loans in their books.

A director in one of the tier-1 banks privy to the development, who spoke under the condition of anonymity, said: “the slowdown in the economy has made more companies to default in the repayment of their loans; this has increased the amount of non-performing loans in banks’ books.

“The CBN regulation requires that provisions be made for these loans. The provisions have caused huge decline in banks’ profits in the second quarter.”

According to other bank executives, while many lenders will post record low profits, at least one or two would post losses in the second quarter.

“Many banks still recorded high NPLs due to record number of defaults from their clients in the manufacturing, consumer goods, real estate, and oil and gas sectors. These dragged down their second quarter profits following the mandatory provision for bad loans,” a risk manager in a tier-2 bank spoke under condition of anonymity.

The economic slowdown in the country made four banks to lose about N17 billion in profits in the first quarter of this year, their financial results posted on the NSE website showed. The banks are Ecobank Transnational Incorporated, Guaranty Trust Bank Plc, Unity Bank Plc and Diamond Bank Plc. They recorded a combined decline of N17billion in their profits before tax for the three months ended March 31, 2016, when compared with the corresponding period of 2015.

According to the 2016 first quarter unaudited financial results filed with the NSE, Ecobank, GTB, Unity Bank and Diamond Bank recorded profits before tax of N20.63 billion, N30.68 billion, N1.05 billion and N6.04 billion, respectively.

When compared with N30.52 billion, N32.65 billion, N4.26 billion and N7.94 billion recorded by the banks in the first quarter of 2015, the combined profit before tax of the four banks dropped by N17 billion from N75.4 billion in the first quarter of last year to N58.4 billion in the same period in 2016.

In terms of their profits after tax, the four banks recorded a decline of N14 billion as they posted record high profits between 2011 and 2014. This followed the establishment of the Asset Management of Corporation of Nigeria (AMCON) in 2010 following the banking sector crisis of the year before, which absorbed the NPLs of the lenders.

Owing to the lenders’ high exposure to the oil and gas sector, the global drop in crude oil prices in 2014 caused their profits to start declining by the end of 2015.

Majority of the 15 banks listed on the NSE recorded decline in their full-year profits in the 2015 financial year. However, a few including Access Bank Plc, Zenith Bank Plc, United Bank for Africa Plc and GTBank outperformed the market despite sizeable volume of bad loans.

This move by CBN to sanitise and stabilise the system in the 2016/2017 fiscal year came in less than one week after the regulator took over management of Skye Bank based on the issue of liquidity challenges, disclosing that “one or two others” were in distress.

It explained that the decision was a measure to prevent a total collapse of the bank. Skye Bank is believed to have an estimated non-performing loan portfolio of N700 billion, much of which is due to an over exposure to the oil and gas sector.

Economic and financial analysts, who are predicting lower profits in the second quarter of this year, linked the development to lower national imports due to foreign exchange challenges, lull in economic activities and slow implementation of the 2016 budget, among others.

The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, said banks would make higher provisions for bad loans in their second quarter results due to the lull in the economy, slow implementation of the budget and reduction in their income lines and profits.

He said: “banks’ income lines have reduced due to the foreign exchange challenges in the country. Many banks cannot engage in trade finance as they should have done due to scarcity of forex.

“Also, lending that should go to the Federal Government contractors could not happen much due to the late passage and implementation of the budget. And more importantly, they will experience higher provisions for bad loans due to the lull in economic activities.”

An analyst at Afrinvest, a Nigeria-based research and investment advisory firm, Mr. Robert Omotunde, said the banks’ performance in the second quarter would be lower than that of a similar period in 2015 due to high impairment charges on the part of the DMBs.

He said: “it appears that banks (because of their resilient nature) will still manage to post profit in their H1 financial results but not as high as that of H1 2015 due to high amount of risks in the system.

“Banks are recording high impairments in recent times. This can also be traced to the high exposure of Nigerian banks to the oil and gas sector. On the average, the exposure rate is currently at 24.5 per cent for all the banks. This is quite high”.

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