Agusto & Co says COVID-19 pandemic with its impact on businesses has elicited an increase in the volume of stage two loans.
The rating agency, in its latest 2020 Banking Sector report noted that stage two loans are susceptible to adverse migrations in the face of a prolonged macroeconomic downturn.
Stage two loans primarily comprise exposures with an increase in the associated credit risk compared to when the loan was disbursed.
According to the International Financial Reporting Standard (IFRS) 9, approximately 23 percent of the Banking Industry’s gross loans and advances was classified in the stage two category as at 31 December 2019. As at the same date, four out of the twenty-four banks covered in the report had stage two loans to gross loans ratios above the 23% Industry’s average.
Also following the forbearance granted by the Central Bank of Nigeria (CBN) in March 2020, permitting banks to restructure loans to businesses that have been adversely impacted by the novel COVID- 19 pandemic, the banking industry had restructured over 7.8 trillion (almost half ) of the loan portfolio as at June 2020
The forbearance is expected to keep the Industry’s impaired loan ratio, which stood at 7.6% as at 31 December 2019, at bay in the short term, Agusto & Co. is however concerned about the performance of these affected loans, given that the coronavirus pandemic is yet to be curtailed and a second wave may be looming.
“A further slowdown in economic activities and a total lockdown may worsen an already bad situation” the report said.
“Stage two loans are a threat to the Industry’s capital base, which has come under pressure in the last three to four years owing to the adoption IFRS 9 accounting standard and the recession. The COVID- 19 pandemic is a further threat to capital which could impact profitability,” the report added.
The report said the Industry’s asset quality is further threatened given significant exposures to vulnerable sectors.
The Central Bank of Nigeria ( CBN) has granted palliatives to banks in form of permitted loan restructurings to certain sectors that have been severely affected by the pandemic and we expect this to moderate the anticipated level of asset quality deterioration in the short term.
The report noted that following the 2015/2016 recession, the Nigerian banking industry has written off a minimum of 1.9 trillion of impaired loans from its loan portfolio.
“This volume of write offs has been driven by the weak macroeconomic climate and the introduction of the IFRS 9 accounting standard in 2019,” the report said.
Agusto & Co. believes that the stage two loans require effective monitoring, particularly in the face of heightened macro-economic risks. The prevailing headwinds make effective monitoring of these exposures imperative to forestall significant deterioration in asset quality, subdued earnings and lower capitalisation ratios in the near term.