Oil Slump, Devaluation Threaten Banks’ Performance | Independent Newspapers Limited
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Oil Slump, Devaluation Threaten Banks’ Performance

Posted: Dec 29, 2015 at 7:45 am   /   by   /   comments (0)

With the price of oil, which is responsible for 70 per cent of Nigeria’s revenue predicted to fall to $20 per barrel and the imminent devaluation of the naira, lenders in the country are in for a much more challenging year as they may be compelled to restructure their credits and debts locally and abroad.

Findings reveal that majority of the debtor oil firms and others linked to it – that have calculated their repayment terms with the price of crude oil, which has consistently taken a bashing at the international markets – would be compelled to renegotiate their loans.

This implies that banking industry’s ratio of nonperforming loans would exceed the stipulated five per cent threshold. Indeed, in a statement issued last month, Fitch Ratings noted that Nigerian banks’ non-performing loans have been rising over the past 12 months.

“We expect them to rise above the Central Bank’s five per cent of total loans cap, but to remain below 10 per cent at year-end,” the agency stated. Similarly, banks that have borrowed foreign denominated currencies would also be forced to restructure their debts as the naira is being expected to be devalued by a minimum of 22 per cent – meaning that lenders would have to put in extra efforts to generate enough cash to repay their debts.

Besides, the implementation of the Treasury Single Account (TSA) – a very cheap source of funds, will negatively impact the industry’s performance in 2016. A bank executive, who spoke on condition of anonymity because of the sensitive nature of the issue, said that the tough times that the industry faced this year were likely to be child’s play compared to what it will face next year.

He pointed out that the International Monetary Fund’s (IMF) recent prediction that oil could slump to $20 per barrel in 2016 had made prospects for Nigerian banks next year worse. He said: “If the IMF’s prediction comes to pass, the impact on the industry will be devastating. Banks are highly exposed to the oil and gas sector.

But these loans were given out when oil prices were above $100. “Since June last year when the sharp decline in the price of oil started, many of these companies have begun to default on their loans.

This has resulted in most banks having to restructure these loans. But any further decline in oil prices as the IMF is predicting will clearly make the situation unmanageable and we could have another crisis triggered by a surge in Non-Performing Loans (NPLs).”

The Central Bank of Nigeria (CBN), in its Financial Stability Report for December 2014 obtained by correspondent, had noted that sustained low oil prices could trigger an increase in NPLs, especially as the exposure to the oil and gas sector accounted for 25.70 per cent or N3.24 trillion of the total credits of N12.63 trillion at end-December 2014. In a recent report, the Nigeria Deposit Insurance Corporation (NDIC) also stated that NPLs in the banking industry increased from N354.84 billion in 2014 to N546.02 billion as at March 2015.

The Corporation disclosed that its examination of banks in the country showed increased loan concentration in sectors, such as power, oil and gas. It will be recalled that earlier this year, DMBs, in compliance with a CBN directive, which was supported by the Bankers’ Committee, had published a list of their delinquent debtors in national newspapers as part of efforts to recover the huge debts owed by such debtors.

The publications revealed that majority of the non-performing loans are in the energy sector – power, oil and gas. Apart from concerns over an increase in NPLs, New Telegraph further gathered that banks are also bothered by one of the likely consequences of the slump in oil prices for an import dependent country like Nigeria – a devaluation of the naira. According to financial analysts, in the event of devaluation, banks that obtained foreign loans will also record losses since they (loans) are dollar denominated. Nigerian banks have about $3.4 billion worth of Eurobonds in issue aside other dollar- denominated foreign loans.

Significantly, in its Financial Stability Report (FSR) for the first half of 2015, the CBN disclosed that it had given three Deposit Money Banks (DMBs) until June 2016 to recapitalise after they failed to hit a minimum capital adequacy rate of 10 per cent.

The regulator did not name the banks, but said they were from the group of 14 lenders that have licenses to operate as regional and national lenders, with respective capital bases of N10 billion and N25 billion. Analysts also believe that even though the reduction in the Cash Reserve Ratio (CRR) to 20 per cent may have gone some way to addressing the industry’s fears over the full implementation of the TSA, the policy will still make liquidity an issue for banks in 2016. Commenting on the CRR cut, international rating agency, Fitch Ratings, said the move will not add liquidity to the Nigerian banking system.

Fitch said: “Lower reserve requirements will not offset the tighter Foreign Currency liquidity at Nigeria’s banks. Our sector outlook for Nigerian banks remains negative. Key financial metrics reported by Nigerian banks are likely to continue to weaken in the closing months of 2015.

Pressure is mounting on regulatory capital ratios and we expect tier 1 capital ratios at many banks to fall below 15 per cent, which is low by recent Nigerian standards.”

According to industry sources, banks are already devising strategies to cope with the envisaged tough environment of 2016 and some of the measures they will adopt could include job cuts.