Banks’ asset quality to improve on higher oil price, production in 2017

The asset quality of Nigerian banks will benefit from rising crude oil price in the international market this year.

Nigerian banks have about 30% of their loan books exposed to the oil and gas sector and have been forced to restructure most of the loans after crude prices fell from the high US$100 in 2014 to a low of US$27 in 2015.

Brent crude oil prices, against which Nigeria’s crude oil grades are benchmarked, closed at US$56.64 on 5 January, well above the average of US$40 that it traded in 2015. Analysts forecast that crude prices may average US$55 in 2017, which is $25 above the average price of US$30 used by many Nigerian banks to restructure their oil sector loans.

“The breakeven oil price for most of the restructured loans for the upstream is $30 per barrel, meaning current oil prices will support the loans going forward,” Akin Majekodunmi, Senior Analyst,

Financial Institutions Group at Moody’s told BusinessDay at a risk conference in Lagos  in November 2016.

Faced with the lower crude oil price, many Nigerian banks have had to restructure their oil loans by increasing loan tenors, allowing struggling clients to pay, based on their cash flow capacity and converting some amortising loans into bullet loans.

“Sixty to 70 percent of loans in the oil and gas sector have been restructured with prodding from the Central Bank of Nigeria (CBN),” Aurelien Mali, Senior Credit Officer, Sovereign Risk Group at Moody’s Investors Service told BusinessDay at the same November risk conference.

Nigerian banks’ exposure to the oil and gas industry is substantial at around 30 percent of total loans, of which about one-third is to the upstream segment.

Guaranty Trust Bank and FBN Holdings have the highest proportion of loans to the oil and gas sector of 40 percent and 35 percent respectively, and large foreign-currency loan exposures, according to Moody’s.

Looking across the Nigerian banking sector, Moody’s expects non-performing loans (NPLs) to increase to around 12 percent over the next 12 months, compared to the 5 percent recorded as of December 2015.

Ten years ago, indigenous Nigerian oil and gas firms produced less than 50,000 barrels per day (bpd), but today, account for 12 percent of estimated 2.2 million bpd production and 20 percent of Nigeria’s oil and gas reserves, according to Ladi Bada, Managing Director/CEO, Shoreline Natural Resources Ltd.

“Efficiency must grow to cope with lower oil prices and militancy. Our largest cost base comes from security and funding,” Bada, whose firm produces about 50,000 bpd mainly for exports, said.

Oil bunkering, attacks and siphoning from shorelines nearly 19 km of pipelines hurt output in 2016, according to Bada.

The prospects of better quality assets has also been boosted by the expectation that the country’s crude oil production will receive a boost, rising from an average of 1.5 million barrels a day in 2016 to an average of two million barrels a day in 2017 on the back lower levels of militancy in the Niger Delta.

The ratio of non-performing loans to total banking credit rose to 11.7 percent at the end of June 2016 from 5.3 percent at the end of 2015, according to data on the CBN’s website.

For the first nine months through September, the cumulative net impairment loss on loans and advances, banks and other assets of 15 lenders spiked by 116 percent to N384.56 billion as bad loans piled on the back of default.

Most analysts acknowledge that last year was difficult for banks in Africa’s largest economy, as the devaluation of the naira, rising bad loans, and an economy that contracted for the first time in 25 years, nearly plunged the sector into a crisis.

The economic slowdown that caused a severe credit crunch dealt a blow on capital adequacy ratios and analysts say lenders will have to raise more capital to overcome the shocks.

Tajudeen Ibrahim, head of research at investment house, Chapel  Hill Denham, said that asset quality may weaken this year, if the macroeconomic environment does not improve.

“There will be need for some banks to inject capital into businesses, especially the Tier 1 lenders,” said Ibrahim.

Experts are of the view that government’s expansionary budgetary spend will help enhance the flow of liquidity in the system, which means the money in circulation will enable customers meet their obligations to the lenders.

“The recovery will be on how much the fiscal authorities are ready to spend,” said Kunle Ezun, research analyst with Eco bank.

“If government spends copiously on capital expenditure, it will enhance liquidity injection in the system and banks will benefit immensely. Government is trying to drive non oil revenue through increase in tax,” said Ezun.

BALA AUGIE