Oil rally sees banks, local firms review loan terms

With oil price recording its longest streak of consecutive daily gains in two years, indigenous oil firms and Nigerian banks are back on the negotiating table to restructure debts, a development that could make or mar the nation’s banking sector.

In Nigeria, the oil and gas business is a drug most big banks find difficult to resist, including the most catholic.

Nigerian banks find the oil and gas business attractive because of their huge capital outlays, large intraday cash flows (in case of downstream companies), sizable foreign currency inflows (in case of upstream and midstream companies).

However, year 2020 re-echoed fears of 2016 as a coronavirus-induced slump in demand not only increased the inventory period of downstream operators but also left millions of Nigeria’s Bonny light crude unsold, and prices as low as $12.

The above development means the indigenous firms that bought assets could no longer generate revenue at the levels expected when they agreed to loan terms, putting themselves and banks at risk.

At the peak of the pandemic, most banks moved quickly to restructure loans, which were nearly N5 trillion as at second quarter 2020, allowing obligors breathing space to generate cash flows, while other banks issued moratorium on loan repayments.

“Banks that have bilateral loans with local oil firms restructure the loans not because it was bad as at that time, but just to make sure it reflects the current economic realities; while for syndicated loans, which are more tedious in terms of restructuring, CBN gave some form of forbearance,” a senior chief financial officer familiar with the matter, told BusinessDay.

Early last year, banks cut a deal with the Central Bank of Nigeria (CBN) as they were granted regulatory forbearance in the restructuring of loans. The deal meant over 33 percent of industry loans were restructured as part of the deals signalling the spate of economic crunch that had hit the private sector.

“Most of the banks book significant impairment charges due to some increased exposure to credit losses due to their exposure to stressed sectors like oil and gas,” Gbolahan Ologunro, an economist at Cordros Capital Limited, said.

According to data from the National Bureau of Statistics (NBS), total oil and gas loan in Nigeria was estimated at about N4.94 trillion as at the second quarter of 2020, or a combined 26.2 percent of total credit to the private sector.

Out of the total N4.94 trillion, oil and gas upstream accounted for N3.6 trillion while downstream sector accounted for N1.3 trillion.

Also, non-performing loans at the end of the second quarter of 2020 rose by 2.27 percent to N1.2 trillion, with the oil and gas sector accounting for 22.17 percent of the total amount.
There is also a growing apprehension that Nigerian banks are bracing up to provide for more bad loans in 2021, especially as forex scarcity or currency devaluation continues to impact negatively on businesses across the country.

A senior executive in one of Nigeria’s tier one banks said most of the projects or developmental plans abandoned in 2020 due to lower oil price were beginning to gain new life as companies have started approaching financial institutions for renegotiations.

“Negotiations are surrounding different hedge products for old projects while new loans will be accessed on a standard loan model,” he said.

With Brent, the benchmark for Nigeria’s Bonny light, hitting $61.02 after a torrid 2020, one would expect that Nigerian banks will be falling over themselves to provide the most attractive offers for independent crude producers, firms who among them pump about 10 percent of national output.

However, most analysts expect banks to be more thoughtful in terms of their 2021 exposure to the oil and gas sector.

“This is because the fate of the oil sector still hangs on the balance of how countries are able to improve vaccination alongside handling the threat of the second wave that continues to threaten the health of the global economy,” Ologunro said.

He explained that the recent uptick in oil prices would mean slower increase in impairment charges for most banks in the coming quarters, which is positive for net profit.

The International Monetary Fund (IMF) is projecting the Nigeria’s corporate sector and possibly the banking sector could face significant impact given that a third of banking sector loans are denominated in FX.

“Strict and proactive enforcement of existing prudential measures to limit FX loans to only those with FX earnings should limit this impact,” the IMF wrote in its Article IV report on Nigeria’s economy released on February 8.

Overtime, Nigeria’s oil and gas sector has been a poster child for growth in Nigeria, but its weak linkages with the rest of the economy have created a bizarre situation where the growth of the sector has increased the size of the wallets of sector participants. But this has not led to the required multiple benefits to the larger society, which wants to see a rise in living standards.

Nigeria’s oil sector expansion has merely supported an accretion of funds to the Federal Account Allocation Committee, which mainly goes into funding rising and bloated recurrent expenditure of the government.

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