Following the adoption IFRS 9, as of December 2018, 10.9% of the loan book representing ₦1.5trillion was in stage 3 according to the recently released Banking Industry Report by Agusto & Co. Stage 3 loans are loans with objective evidence of impairment at the reporting date. In the previous period, Stage 3 loans can be assumed to be “individually impaired or non-performing loans”.
In 2017 non-performing loans was ₦1.3trillion, this accounted for 9.5% of the loan book. The 15% increase in stage 3 loans in 2018 compared to 2017 is evidence of the deterioration of the loan assets recognized by Nigerian banks, this is largely due to the fact that most companies are yet to recover from the economic recession particularly the impact of the foreign exchange rate crises.
The Industry’s Stage 2 loans and advances as of December 2018 were ₦2.9 trillion; this represents 22% of gross loans. In prior periods, Stage 2 loans can be assumed to be “past due but not impaired” and it amounted to ₦793 billion in 2017.
Although Stage 2 loans do not have objective evidence of credit loss, these loans should be monitored closely to ensure that it does not deteriorate to Stage 3. If after 90 days, there is no longer evidence of a significant increase in credit risk, such loans could be transferred back to Stage 1. Comforting, however, the banking Industry has provided for 87.35% of the industry’s non-performing loans.
Agusto & Co. in its recently published 2019 banking report also revealed that the Banking Industry’s total loans declined by 2.8%, this is largely due to the repayment by some customers and the cautious approach by banks towards extending further loans due to weak macro-economic climate.
In the near term, Agusto & Co expect a reduction in NPL ratio but this will not be significant. We also expect that there will be no significant growth in the Industry’s loan book as banks will continue to be risk-averse in the face of harsh operating terrain.