A combination of rising interest rates, surging inflation, and the devaluation of the naira led to a 260.9 percent surge in the impaired loans in the books of seven listed Nigerian banks, data compiled by BusinessDay shows.
The lenders are Zenith Bank Plc, United Bank for Africa (UBA) Plc, FCMB Group Plc, Stanbic IBTC Holdings Plc, Guaranty Trust Holding Company (GTCO) Plc and Wema Bank Plc.
The latest financial statements of the banks show that their combined impairment charges jumped to N949.3 billion last year from N263 billion in 2022. The 260.9 percent increase in impaired charges is higher than the 39.1 percent growth recorded in 2022.
A loan is impaired when it is not likely the lender will be able to collect its full value as it is not performing according to the original terms of the agreement. It is a type of credit impairment with others such as credit deterioration risks and loan losses.
“It is expected that banks’ impaired loans will surge, given the challenging macro conditions. This simply means that more assets (loans and investment securities) are no longer performing. For instance, more impairment may have been taking on Ghana Eurobonds if it was conservatively done in 2022,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.
He said tougher business conditions may have adversely affected businesses that these financial institutions have extended different facilities, plus the frequent macroeconomic shocks since 2020, from COVID to the Russia-Ukraine crisis.
“I believe that the Central Bank of Nigeria (CBN) knows this could threaten the financial system, hence the urgent need for fresh cash in the banking sector. With the new inflows into this sector, banks are likely to be able to sufficiently weather threats from further potential bad assets that could result from facilities that are currently running,” he said.
Fitch Ratings, a global credit rating agency, last July had earlier predicted Nigerian banks would see a jump in impaired loans as rising inflation and interest rates burdened borrowers’ debt servicing capacity.
Fitch considered the implementation of the key reforms implemented by President Bola Tinubu to be credit-positive overall for the country.
It said the devaluation of the naira and the fuel subsidy removal would lead to higher near-term inflation and tighter monetary policy, which would in turn constrain economic growth.
“These developments exert downward pressure on capital ratios and will cause impaired loan ratios to rise higher than previously envisaged.”
A further analysis shows that GTCO recorded the highest growth in impaired loans of 764.7 percent to N102.9 billion, followed by UBA with 632.3 percent increase to N144.1 billion, and Zenith with 232.2 percent rise to N409.6 billion.
Others such as FBN Holdings, FCMB, Wema, and Stanbic IBTC had 192.1 percent, 166.3 percent, 121.8 percent, and 50.1 percent increases respectively. However, Access Holdings and Sterling Holdings recorded declines of 29.5 percent and 2.5 percent.
In terms of loans to customers, Access Holdings posted the largest of N8.04 trillion in 2023, followed by Zenith (N6.56 trillion), FBN Holdings (N6.36 trillion), UBA (N5.23 trillion), GTCO (N2.48 trillion), Stanbic IBTC (N2.03 trillion) FCMB (N1.84 trillion), Sterling Holdings (N902 billion) and Wema (N801.1 billion).
“Most banks made significant provisions given the increase in their loan books that came at a time where macro conditions did not support an increase in creating risk assets,” Gbolahan Ologunro, portfolio manager at FBNQuest, said.
He said most of them decided to make adequate provisions because macro conditions remain broadly weak and the impact of the devaluation of their foreign currency loans.
The benchmark interest rate, also known as the monetary policy rate (MPR), has been raised by 725 basis points to 18.75 percent in May last year from 11.50 percent in April 2022.
Last month, the CBN raised the MPR for the second straight time by 200 basis points to 24.75 percent in a bid to fight inflation. In February, the apex bank increased the interest rate by 400 basis points to 22.75 percent.
Since Tinubu announced the removal of petrol subsidies during his inauguration on May 29, petrol prices have more than tripled to N600, while the value of the naira has plunged following the floating of the currency.
The apex bank last June merged all segments of the foreign exchange market into the Investors and Exporters window and reintroduced the willing buyer, willing seller model.
The official exchange rate fell from N463.38/$ to N 1,136.0/$ as of Monday. At the parallel market, the naira is being traded at around 1,120/$ as against 762/$ before the FX reform.
There were a lot of headwinds that confronted the business environment last year which impacted the performance of borrowers and the ability to repay, said Adeola Adenikinju, president of the Nigerian Economic Society.
“There was also a very high interest rate and inflation went up significantly. And it is a measure of the state of the economy that these banks have to write off or make provision for non-performing loans.”
Over the past 10 months, the inflation rate in Africa’s most populous nation has accelerated to the highest largely on the back of the federal government reforms including the removal of petrol subsidy and naira devaluation.
Data from the National Bureau of Statistics shows that Nigeria’s headline inflation rate rose for the 15th consecutive time in February to 33.20 percent in March, up from 31.70 percent in February.
In 2023, Africa’s biggest economy grew at the slowest pace in three years as its Gross Domestic Product growth fell to 2.74 percent last year from 3.10 percent in 2022.
“The significant rise in impaired loans for banks speaks a lot. People getting loans from them are facing challenges in repaying. The rise could also reflect the banks’ pessimism about the real sector environment. But for the fact that it more than doubled is a cause for concern,” Israel Odubola, a Lagos-based research economist, said.
He added that the economy suffered severe challenges last year from the massive foreign exchange depreciation to the skyrocketing inflation.
“So, these negative indies made banks to be more cautious with their loan books, hence making huge provisions for those bad debts.”
The foreign exchange gains were a major contributing factor to the eight banks’ total profit as it more than tripled to N2.8 trillion in 2023 from N897.4 billion.
Access Holdings, UBA, and GTCO were the three banks that recorded the highest growth in after-tax profit last year with 305 percent, 256.8 percent, and 219 percent respectively.
FCMB Group recorded 207.1 percent growth followed by Zenith Bank (202.3 percent), Fidelity Bank (116.9 percent), Stanbic IBTC Holdings (74.2 percent), and Sterling Financial Holdings Company (11.4 percent).
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