• Saturday, July 20, 2024
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Need to prevent new oil-related bank losses


Nigerian banks are heavily exposed to the oil and gas sector. As such, the Central Bank (CBN), the regulator, must move aggressively to avoid a new round of non-performing loan (NPL) crisis.

The oil and gas sector now makes up the largest component of total credit extended by Nigerian banks, with its proportion doubling to 22 percent in 2013, from 11 percent in Q1 2008.

The six largest Nigerian banks – FBN Holdings, Zenith Bank, Guaranty Trust Bank, United Bank for Africa, Access Bank and Stanbic IBTC – had oil sector loans equivalent to 40 percent, 17.9 percent, 28 percent, 16 percent, 24.7 percent and 19 percent of total loan book, respectively, according to Bloomberg data.

Nigerian banks’ huge exposure to the sector (upstream, services and downstream) amid steep decline in oil prices is throwing up comparisons to 2008 when oil prices declined from $146 per barrel (pb) in July to $36pb in December, leading to pressure on government revenues, devaluation of the naira, an equity market crash and spike in banking sector NPLs.

Brent crude traded at $49.45 at 11:40 a.m. London time on the ICE Futures Europe exchange, last Friday. It averaged $99 in 2014.

The steep fall in prices has put pressure on oil companies’ balance sheets, making them more susceptible to default on loans extended by banks.

Shares in Afren plunged more than 65 percent last week Tuesday after the Nigeria-focused oil group revealed it needed to raise more capital. Afren blamed the fall in oil prices for its funding crisis, which has left it unable to meet its repayment obligations to lenders and capital expenditure requirements in Nigeria.

Renaissance Capital says a $40pb oil price may trigger loan restructuring discussions between Nigerian banks and oil companies.

The Nigerian Stock Exchange (NSE) Banking Index has dropped 14.47 percent this year, reflecting investor anxiety over bank earnings due in a couple of weeks.

The naira fell 14 percent against the dollar last year as the slide in oil meant the CBN had fewer dollars to defend the local currency.

Non-performing loans in Nigeria’s banking sector will climb to between 5 percent and 10 percent by the end of 2015, from less than 3 percent now, Fitch Ratings said last year.

We understand that the CBN has moved to undertake a stress test for the banking system. This is a welcome development because we believe this will help to ensure system stability.

Nigerian banks extended loans to oil firms to buy assets often with stretched valuations from International Oil Companies (IOCS) during the boom times when oil was above $100pb. Those assets are now expected to be re-priced given current oil prices.

Some banks are said to exceed the single-sector limit for loans put at 20 percent by the CBN. We urge the CBN to improve on its risk supervision of banks and extend fines and penalties for any infractions.

It is also our considered view that the Asset Management Company of Nigeria (AMCON) should begin preliminary discussions with banks that wish to offload bad loans, although this should be done at a significant haircut for the banks. Nigeria cannot afford another banking shock now.