How regulatory, other issues soften banks’ performance in 2015

The performance indicators in the Nigerian Banking space indicated that performance softened in 2015 as events in the socio-political, economic and regulatory environment heightened risk consciousness, slowed the pace of credit expansion, deteriorated asset quality and weakened earnings capacity across all tiers in the sector, according to an assessment by Afrinvest West Africa which last week launched the 2016 Banking Sector Report.

Aside from this, other major regulatory issues that defined the performance of the banking sector in 2015 were harmonization and subsequent downward revisions of the Cash Reserves Ratio (CRR) to 25.0 percent and 20.0 percent before an upward adjustment to 22.5 percent in March 2016, implementation of the Treasury Single Account (TSA) by the Federal Government, and increase in general loan loss provisions to 2.0 percent (from 1.0%) in the face of sharply rising Non-Performing Loans (NPLs) and weaker asset quality.

Accordingly, the resilience of the Nigerian banking sector was put to the test as elevated risk concerns triggered a spike in NPL ratio and slowed the pace of credit expansion dramatically. Gross loans and advances dipped 1.9 percent in 2015 acrossour coverage universe compared to the 26.6 percent growth in 2014 as lower oil prices, FX volatility and liquidity concerns dampened risk appetite amidst a hazy economic road map. Thus, growth in industry gross earnings moderated to 10.3 percent in 2015 (compared to 14.6% in 2014). At the same time, liquidity in the banking system (especially among Tier-2 banks) was pressured by the TSA implementation, which sterilized approximately N1.2 trillion from the banking system.

NPL ratio spiked to 4.9 percent from 3.0 percent in 2014. Furthermore, Return on Equity (ROE) moderated to 9.1 percent from 15.5 percent in 2014. Capital Adequacy Ratio (CAR) was strained on account of revised computation guidelines and increase in general loan loss provisioning settling at 16.5 percent in 2015 (relative to 19.7% in 2014). Total deposits dipped 1.8 percent Y-o-Y to N20.7 trillion while total assets (+3.3%) and liabilities (+1.1%) increased Year-on-Year.

Against the backdrop of lower oil prices that has weakened macroeconomic fundamentals, the outlook for the sector in 2016 was expected to be dominated by developments in the FX market. Accordingly, Afrinvest analysts identify risk areas for Nigerian Banks to include- credit exposure to high risk sectors: “We see four high risk sectors to asset quality in 2016 to include Upstream Oil & Gas, General Commerce, Manufacturing and Power.”

Other risk areas include pressure on Capital Adequacy Ratio (CAR) in the aftermath of the depreciation of the naira,….. restrained appetite for both sovereign and corporate Eurobonds.

Ike Chioke, managing director/CEO of Afrinvest, who gave a review of the banking sector at the event, highlighted the firm’s expectations for the performance of the sector to include risk assets to expand nominally due to currency adjustment, weaker asset quality, constrained gross earnings, higher yield environment positive for interest yielding assets, cut back in OPEX and retrenchment, reduced profitability, and lower Capital Adequacy Ratio (CAR) among others.

 

HOPE MOSES-ASHIKE