Highlight of 2015 banking industry challenges

As the year 2015 comes to an end tomorrow, the need to appraise the performance of the banking sector of the Nigerian economy cannot be over emphasised.

There is no doubt that 2015 was a very challenging year for the sector, as acknowledged by Boladeola Agbola, executive director, Cashcraft Asset Management Limited.

The dwindling fortunes of the nation as the crude oil price declined from about $50per barrel in January to about $37 in December in continuation of its descent from the peak $114per barrel in June 2014 impacted negatively on business activities and most especially access by banks to foreign exchange.

During the year under review, banks could not open letters of credit for their clients as they use to do because there is no foreign exchange to back it up which means reduced income for the industry. Credit to clients also shrank as the economic growth slows down.

The implementation of Treasury Single Account (TSA) during the year effectively reduced government borrowing. This led to crash in treasury bills rates and loss of spread by banks. The banks that are heavy in public sector funds not only lose the treasury but opportunity to earn income as the funds went to the Central Bank of Nigeria (CBN). As the economy weakens credit collection became seriously hampered which implies possible escalation in loans loss provisioning for the banks as they close their accounts for the year.

“Overall, it is doubtful if the banks might have had a good year.2016 may be equally challenging given the outlook of the crude oil market which might deteriorate further as United States lift ban on crude oil export ,Iran resumes oil export by the first quarter of 2016 while OPEC remains incapable of cutting production to moderate prices”, Agbola said in an emailed response to BusinessDay.

The trend might only change if demand goes up on the heels of an unlikely short term massive global recovery by the leading economies especially importers of crude oil like China and India ,and Nigeria makes progress in restructuring her economy.

Corroborating with Agbola, the managing director/CEO of one of Nigeria’s leading tier II banks said 2015 was a very challenging year, with much of the effects of the challenges still spilling into 2016. Oil price fall affected risk asset quality. Illiquidity and non availability of foreign exchange affected revenues deposit growth and asset quality. Overall economic slowdown also took its toll on revenues.

On the positive side, the source said there is greater seriousness and commitment to diversify the economy. Also loosening of monetary policy that started very late in the year is a positive for loan growth – the primary task of a bank that had taken a back seat in the last two years, but a negative on interest margins for the industry.

The growing concern by investors in Nigerian banks’ debt is that as the country’s forex liquidity situation worsens, oil prices continue to decline companies struggle to access FX to liquidate their FX obligations, some of the forex borrowings were on-lent to power companies with Naira revenues, and other Naira generating companies.

“What does it mean for the sector’s ability to service interest and principal on their obligations? We think this concern is valid and will remain a topical issue through this cycle”, Adesoji Solanke, banking analyst at Renaissance said in a report.