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Economic slowdown shows up in doubtful loans surge

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Nigerian banks are seeing a surge in impaired loans, a further signal of the slowdown in growth being experienced in the wider economy.

Zenith Bank, Guaranty Trust Holding Company (GTCO), United Bank for Africa (UBA), and nine other commercial banks booked combined impairment costs of N658.73 billion in the first half of 2023, a 285.2 per cent increase from N171 billion in the corresponding 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 macro-economic challenges,” Nabila Mohammed, research analyst at Chapel Hill Denham.

A loan is said to be impaired when it is not likely the lender can collect its total value.

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

Zenith Bank, the country’s biggest lender by market value, provided N208 billion, the highest of the pack, followed by United Bank of Africa (N143 billion).

“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.

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According to GTCO’s investor presentation, the Group recognised N81.3bn in H1-2023 as an impairment charge on other Financial Assets (FA) 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-one 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.

Lateef added, “Banks made a lot of profits this year, so this is the best time to make impairments for loans they predict might turn bad.”

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 (N0.03billion).

Last July, Fitch, 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.

Fitch Ratings 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 July Report.

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The rating agency said since the devaluation; it has affirmed the ‘B-’ long-term issuer default ratings of most 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 considers the key reforms implemented by President Bola Tinubu to be credit-positive overall for the country.

It, however, said the naira devaluation would lead to the inflation of banks’ foreign-currency (FC)–nominated risk-weighted assets (RWAs) 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.

The rating agency said that the exchange rate will also depend on the extent to which the country succeeds in attracting foreign investment following the devaluation.

It said foreign portfolio investors’ participation in the domestic equity market has increased since the devaluation, adding that sustained inflows will require commitment to structural and market-friendly reforms, including a more orthodox approach to monetary policy.

Fitch expects the fuel subsidy removal to reduce reliance on deficit financing from the central bank, which has been a major contributor to loose monetary policy settings, with a disinflationary impact in 2024.