Fears heighten in banks over rise of non-performing loans

Nigerian banks are currently grappling with the biggest surge in bad loans since at least 2011 after half – year results showed weak profit growth amid a struggling economy.

The nine lenders (FBN Holdings, Stanbic IBTC, Unity, FCMB, Diamond, Fidelity, Skye, Union and Wema) that have released half year 2015 results reported a N30.1 billion jump in provisioning for soured credit.

Stanbic IBTC, Fidelity and First Bank were the most affected with loan loss expenses surging by 449 percent, 275 percent and 239 percent respectively.

Analysts say the trend suggests banks will eclipse the Central Bank of Nigeria (CBN)’s minimum non performing loan ratio target of five percent with Renaissance Capital suggesting the likelihood of increase in FBNH full year 2015 NPL ratio to seven percent.

They further argue that the deteriorating macro – environment could mean that some loans may go sour for lenders, especially in the oil and gas space.

Their argument is premised on the fact that apart from the fact that some of the debtor firms whose names appeared on the list are moribund, some of the affected local governments may find it difficult to repay, given their transient nature and the states’ financial stress.

“FBNH management attributed the higher cost of risk (CoR) guidance to its oil and gas upstream book. We conservatively assume that the bank’s exposure to Atlantic Energy, which was last put at c. $400mn (4% of 1H15 loans), is a key driver,” Adesoji Solanke Sub-Saharan Africa banking analyst at RenCap said in a July 31 note.

Former CBN governor Sanusi Lamido Sanusi raised significant concerns about the transparency around contracts awarded to Atlantic and other related companies, such as Septa Energy and Seven Energy, including concerns about non-remittance of oil sale proceeds to the Federation Account.

The price of the commodity (oil) which makes up 70 percent of government revenue and 95 percent of exports is down some 50 percent in the past year.

The naira also depreciated significantly against the U.S. dollar by about 15 percent over 2014.

The uncertain macro – economic environment may lead to a rise in credit losses for banks in 2015, according to Standard and Poor’s.

Credit losses for the industry could increase, as loans begin to season in 2015, and pressure mounts on lending in natural resources, public utilities, and foreign currency, according to Matthew Pirnie, director of Financial Services Ratings at Standard and Poor’s (S & P).

“Banks’ reduced profitability will likely lead to rapid loan growth in sectors where risks are not fully understood, including small and midsize enterprises, retail, energy, and foreign currency lending,” Pirnie told BusinessDay in a recent interview.

Nigeria’s economy is forecast to expand this year at the slowest pace since 2009 and lenders face weaker asset quality due to delayed salary payments to government workers and contractors, and risks to general commerce.

BusinessDay calculations from the list of bad debtors published on Monday, showed that the total debt owed by real sector players to Stanbic IBTC, Zenith, Union, Skye, GTB and Enterprise Bank amounted to N9.57 billion.

It was observed that many real sector players involved are either small or medium scale players, with not-too-strong financial power, less than N500 million annual turnover and employees of 200.

Most manufacturers who spoke with BusinessDay received the news with mixed feelings, with some stressing that it is bad to the image of corporations involved.

According to them, companies were unable to meet banks’ obligations, owing to the high cost of doing business in the country, unpredictability of government policy and high-risk involved in the economy.

“No one will be happy to owe banks if there is some level of certainty. Imagine a situation where some of us felt that government would honour the Export Expansion Grant, only for the same government to cancel same,” an involved exporter lamented.

The exporter said the immediate past government had promised to pay some grant for every export, only to cancel it midway, saying that many exporters  took loans from banks to do the export business with the hope that they would be refunded.

“But we were unable to pay back because of this,” the exporter said.

Before the publication, Remi Bello, president, LCCI, the chamber, said given the adverse consequences of NPLs) for the stability of the financial system and its risk to depositors’ funds and the sustainability of the banks, there is a compelling reason to take some drastic actions to avoid the grave consequences of mounting bad loans, estimated at over N400 billion.

“The LCCI recognises two broad categories of debtors,” the statement said.

“There are defaults that have arisen as a result of genuine business failure (some of which are irreversible) which affected the capacity to repay. There are also defaults that have arisen as a consequence of deliberate intent not to repay. The latter borders on character quality, which is what the Know Your Customer [KYC] concept is meant to address,” LCCI said.

Apart from the fact that some firms such as Starcomms are moribund, the debt list also showed that local governments such as Ondo East, Akoko North West, Idanre, Ifedore, among others, are involved. Given the transient nature of Nigeria’s local government system and states’ financial stress, analysts say the loan may, after all, never be paid.

PATRICK ATUANYA, BALA AUGIE & ODINAKA ANUDU