Rising interest rates have driven loan defaults, raising banks’ impairment charges by 69 percent in the first half (H1) of 2023 when compared with the corresponding period of 2024.
According to data tracked by BusinessDay, the net impairment charges of six banks in H1 of 2024 hit N648 billion, representing a 69 percent year-on-year growth from the N382.5 billion recorded in H1 of 2023. The banking groups are: Access Holdings, GTCO Holdings, FCMB Group, Wema Bank, Stanbic IBTC Holdings, and Zenith Bank.
Impairment captures a reduction in the value of a firm’s assets. It is otherwise captured as provision made for loan losses. Firms use impairments to write off worthless goodwill or report a reduction in good will.
In the first half of 2024, the Central Bank of Nigeria (CBN) hiked the country’s benchmark rate by 750 basis points from 18.75 percent to 26.25 percent. Since July, the rate has been hiked further by 100 basis points.
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In terms of earnings, the Monetary Policy Rate (MPR) hikes have proven beneficial for banks, as those under review reported interest incomes totalling N3.7 trillion in the first half of 2024—a 137 percent increase from the N1.56 trillion recorded in the same period of 2023. However, the rising rates have been telling on customers as banks have to provision higher amounts as expected credit losses.
Despite rising impairment allowances, the results from the six banks indicate improved risk management, with their cumulative impairments to net interest income ratio for H1 2024 standing at 35 percent, down from 47 percent in H1 2023.
According to the review done by BusinessDay, the net impairment charges feature expected credit losses on financial instruments such as loans and advances to customers and banks, investment securities, and treasury bills. It also features impairment charges on non-financial instruments.
Zenith Bank, with a net interest income of N715.1 billion, provisioned a whopping N415.3 billion as net impairment charges, representing a 100 percent year-on-year increase from the N207.9 billion provisioned in H1 2023. A breakdown of the bank’s impairment charges shows an expected credit loss of N381.3 billion on financial instruments, with N352.1 billion of this sum provisioned on loans and advances.
Access Holdings provisioned about N122.7 billion as impairment charges during the half-year, representing a 230 percent growth from the N37.1 billion provisioned in H1 2023. The bank posted a N1.29 trillion interest income in H1 2024, 116 percent greater than the N596 billion interest income recorded in H1 2023.
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For Access Holdings, about 50 percent of its impairment allowances were on its loans and advances to customers, as the bank provisioned about N20.6 billion as impairment on investment securities.
On the other hand, GTCO Holdings, reported a 43 percent year-on-year drop in its impairment allowance, as it provisioned about N47.4 billion as net impairment charges in H1 2024, in contrast with N83 billion as of H1 2023. However, the bank’s Stage 3 expected credit losses increased to N9.8 billion, from N719.5 billion as of H1 2023.
GTCO’s decision to lower its impairment charges remains difficult to fully justify. However, a noteworthy development is the 209 percent year-on-year increase in interest payments, with the bank receiving N545.5 billion in the first half of 2024, compared to N176.7 billion during the same period in 2023. Zenith Bank also took receipts of N607.9 billion in interest payments during the half-year, marking a 118 percent growth from N278.4 billion received in H1 2023. Access Bank received N631.9 billion in interest payments during the same period, up by 157 percent from N246.3 billion in H1 2023.
Other banking groups such as Stanbic IBTC Holdings, Wema Bank, and FCMB Group provisioned N26.5 billion, N4.65 billion, and N31.3 billion as net impairment charges for H1 2023. However, just like GTCO Holdings, FCMB Group also posted a 33 percent year-on-year drop in its impairment allowance, despite an 81 percent growth in its interest income. About N33 billion was provisioned by FCMB Group as impairment losses on its loans and advances, however, this figure was helped by the recovery of about N3.49 billion which was previously written off loans.
Speaking during the bank’s Fact Behind the Issue presentation in July, Ladi Balogun, FCMB group CEO, noted that the bank had provisioned about a huge chunk of its FX gains to cover for impairment losses in 2023.
He also noted that in 2024 the bank had provisioned most of its FX gains to cover for impairment losses.
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