• Friday, December 08, 2023
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Banking sector non-performing loan to rise 4.6% in 2015

Banking sector non-performing loan to rise 4.6% in 2015

The banking sector, while attractive with low valuations, would have to navigate a difficult operating environment in 2015, as regulatory actions amid economic challenges cap loan growth, according to analysts at Vetiva Capital Management Limited.

“With the continuous decline in global oil prices, banks’ exposure to the oil and gas sector has come under the spotlight with fears of possible loan default even as the oil and gas value chain account for the biggest share (an average 25%) of banks loan portfolios; we forecast aggregate industry non-performing loan (NPL) ratio of 4.6 percent for 2015,” Vetiva analysts said.

Meanwhile, banks asset quality as reflected by the ratio of NPLs to total loans improved to 3.23 percdnt in 2013, from 3.51 percent in 2012, which compared favourably with the industry maximum threshold of 5 percent, the Nigeria Deposit Insurance Corporation said in its 2013 annual report.

Under best case scenario, analysts at Exotix Frontier Equity Research estimate the average cost of risk and NPL ratio increases by 100bp and 130bp in FY15 to 2.3 percent and 4.3 percent, respectively.

“Base case scenario: we assume the average cost of risk and NPL ratio increases by 210bp and 200bp in FY15 to 3.4 percent and 5.0 percent, respectively.

“Worst case scenario: we assume cost of risk for each bank increases to crisis-level highs and therefore estimate an FY15 cost of risk of 6.0 percent,” the analysts said in a report.

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While Vetiva analysts estimate gross earnings will grow marginally in 2015, they expect the pressure on efficiency to persist. “Nonetheless, we forecast an average 6 percent earnings growth for our coverage banks in 2015, driven by the low 2014 base for the top tier banks,” the said.

Exotix Frontier Equity Research recently updated its earnings estimates for Nigerian banks universe following their 3Q14 results, the significant decline in oil prices and subsequent depreciation of the naira.

“Our average full-year Price-To-Book Equity Per Share FY15f P/BVPS estimate of 0.6x is on par with the average of the low P/BVPS hit by the banks during the previous banking crisis between 2009 and 2013 (see Figure 12 on page 9).”

According to the research firm, despite the higher exposure to the oil and gas sector and foreign exchange-denominated lending, it believes banks’ cost of risk is unlikely to increase to 2009 levels due to: significantly lower exposure to margin loans, which were a big driver of NPLs during the last crisis; higher exposure to the less vulnerable upstream sector; stronger downstream sector following the consolidation in 2012, after the fuel subsidy investigation; and natural hedge on significant proportion of foreign currency lending as underlying revenues are FX-denominated.

“We also think the rate of crystallisation of cost of risk will not be as severe as banks now report earnings in the more conservative International Financial Reporting Council (IFRS) format, compared to Nigerian Generally Accepted Accounting Principles (GAAP) during the previous crisis,” according to them.