Economic slowdown shows up in banks’ doubtful loans surge

…Impairment costs rise by 285 percent

Nigerian banks have seen a surge in impaired loans, reflecting the slowdown in economic growth in recent years.

Zenith Bank, Guaranty Trust Holding Company (GTCO), United Bank for Africa (UBA), and nine other commercial banks booked combined impairment cost of N658.73 billion in the first half of 2023, a 285.2 percent increase from N171 billion in the same period of 2022, according to BusinessDay’s calculation.

“Most banks are being proactive by booking higher impairment charges due to exposure to businesses who may likely struggle to repay loans due to higher interest rate environment and rising macroeconomic challenges,” Nabila Mohammed, research analyst at Chapel Hill Denham, said.

A loan is said to be impaired when it is not likely the lender will be able to collect its full value.

“The banks are looking at the country’s macroeconomic dynamics currently affecting businesses and taking proactive measures to avoid recording losses,” Mohammed added.

Zenith Bank, the country’s largest lender by market value, made the biggest provision of N208 billion, followed by United Bank of Africa (N143 billion).

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“Impairment levels increased significantly in recognition of the heightened risk environment, resulting in the cost of risk growing from 1.4 percent to 8.8 percent,” Zenith Bank said in its audited H1 2023 result.

In distant third is GTCO, which made a provision of N82.96 billion, while FBN Holdings and Ecobank both booked impairment losses running into N57.63 billion and N50.46 billion respectively.

According to GTCO’s investor presentation, the group recognised N81.3 billion in H1 2023 as an impairment charge on other financial assets also by way of management overlay as loss rate heightened on its investment in Ghanaian sovereign securities and other foreign currency financial instruments whose underlying values are sensitive to adverse exchange rate movement.

Tesleemah Lateef, banking analyst at Cordros Securities Limited, said the increase in impairment costs for tier-1 banks is majorly for bad investments such as Ghana sovereign securities and rising bad loans in Nigeria.

“They are making provisions for bad loans due to unimpressive macroeconomic challenges,” Lateef said. “Banks made a lot of profits this year;;so this is the best time to make impairments for loans they predict might turn bad.”

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Other banks with impairment costs include FCMB (N47.08 billion), Access Holdings (N37.18 billion), Fidelity (N19.92 billion), Stanbic IBTC (N5.98 billion), Sterling Holdings (N4.16 billion), Wema (N1.40 billion) and Unity Bank (N0.03 billion).

In July, Fitch Ratings, a global credit rating agency, predicted Nigerian banks will see a jump in impaired loans as rising inflation and interest rates burden borrowers’ debt servicing capacity.

It said the devaluation of the naira and the fuel subsidy removal will lead to higher near-term inflation and tighter monetary policy, which will, in turn, constrain economic growth.

“These developments exert downward pressure on capital ratios and will cause impaired loans ratios to rise higher than previously envisaged,” it said in a report.

The rating agency said since the devaluation, it has affirmed the ‘B-’ long-term issuer default ratings of the vast majority of Nigerian banks, with stable outlooks.

“This reflects the banks’ sufficient headroom above their minimum total capital adequacy ratio requirements to absorb the negative impact of the devaluation and the second-order economic effects of the reforms on asset quality,” it added.

Fitch considered the implementation of the key reforms implemented by President Bola Tinubu to be credit positive overall for the country.

It, however, said the naira devaluation will lead to the inflation of banks’ foreign-currency (FC)-denominated risk-weighted assets in naira terms, exerting downward pressure on capital ratios.

It will also inflate FC-denominated problem loans, thereby increasing the prudential provisions banks are required to maintain against them, adding to pressure on regulatory capital ratios, it said.