Nigerian banks are getting ready for the adoption of International Financial Reporting Standards (IFRS) 9, which could see their Non-Performing Loan (NPLs) ratios begin to creep up as lenders may be forced to make new provisions for loans that were hitherto not recognised.
Chief Finance Officers (CFOs) of banks are concerned about unforeseen and unintended consequences of the new rules on banks provisioning, capital, liquidity, leverage and margins.
Banks will start applying IFRS 9 standards to their 2018 financial results.
The application of these new rules means loans that had escaped classification as NPLs may now be classified which would sour bad loan books, according to Kunle Ezun, research economist at Ecobank Nigeria Limited.
Renaissance Capital, an investment banking firm, in an investment note expressed the opinion that banks, could see Cost of Risk (CoR) come in marginally higher at the end of their 2018 financial year as a result of the adoption of the new standard.
The CoR is the banks loan loss provisioning divided by the total loan portfolio expressed as a percentage. A higher CoR means impairment charges will be high.
IFRS 9 could result in a 30-basis point increase in CoR for Zenith Bank, which implies CoR of 1.5 to 1.6 percent and Access Banks management is expecting a 20- basis point increase in CoR, relative to 9-months 2017 CoR of 0.9 percent. A basis point is equivalent to 0.01% or 100 th of one precent.
For GTB there will be a 100-150 basis points decline in Capital Adequacy Ratios (CAR), according to RenCap. For the nine months end September 2017, GTBank reported a CAR of 22.9 percent
UBA, Fidelity and Stanbic IBTC, could see CARs decline by 80-100 basis points, 40-50 basis points and a 100 basis points respectively, according to RenCap.
IFRS 9 Financial Instruments issued on 24 July 2014 in Nigeria is the IASB’s replacement of IAS 39 Financial Instruments: Recognition and Measurement.
The Standard includes requirements for recognition and measurement, impairment, de-recognition and general hedge accounting. The IASB completed its project to replace IAS 39 in phases, adding to the standard as it completed each phase.
The standard was introduced to make banks recognize expected credit losses on a timely manner as delay in recognizing such expenses contributed to the global financial crisis of 2008.
The IFRS 9 is principle based and it does not provide any standard model for computing the Expected Credit Loss (ECL), according to CFO Innovation and Strategic Intelligence, a research firm.
The research institute added that another worry for CFOs is how to measure the impact of the adoption of the IFRS 9 on bottom lines (profit) as huge write offs and change in the accounting and reporting system such as a general system of ledger and journal could further expose banks to huge costs.
“In the Deloitte study, 81 percent of respondents in banks with over €100 billion in gross lending and 64 percent of all other respondents said they expect a significant impact on the volatility of the bank’s P&L account under IFRS 9 compared to IAS 39,” said the report.
Banks in Africa’s most populous nation and largest economy are recovering from souring bad loans as the economy improves on the back of higher oil production and the apex bank’s new foreign exchange window for investors.
The cumulative Impairment charge otherwise known as loan loss expense of 13 banks that have released third quarter 2017 results dipped by 20.15 percent to N287.30 billion from N359.82 billion I 2016, based on data compiled by BusinessDay.
“We estimate that NPLs will increase by up to 30 percent across assets classes on transition to IFRS 9,” said Gloria Fadipe, head of research at CSL Stock Brokers Limited.
However Ayodeji Ebo, managing director and CEO of Afrivest Limited, says he does not expect the impact of the adoption of the new standard to be very serious because some of them have done scenario testing before now.
“That will have taken care of NPLs,” said Ebo.
First Bank Nigeria Plc’s NPLs as at September 2017 stood at 20.10 percent of its loan book, though lower than the 24.90 percent recorded the previous year.
Diamond Bank’s had NPLs of 9.50 percent of loan book as at September 2017.
The MD, Cowry Asset Management Limited, Johnson Chukwu, told Business that tier-II banks may not enjoy the same level of improvement on their cost of risk in an improved macroeconomic environment as the quality of risk assets of tier-II banks are in most instances lower than those of tier 1 banks such that in periods of improving economic conditions, such loans do not recover as much as those of blue chip companies, who are the normal beneficiaries of tier 1 banks loans.
“The tier 1 banks enjoy more economies of size in managing their cost of risk due to their larger loan portfolio and balance sheet size,” Chukwu said.
Nigeria’s tier-II banks control less than 40 percent of banking assets in the country. This implies that even where their loan books fail to improve, the risk they pose to the country’s financial sector is minimal.
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