Banks’ Q1 slump shows high oil exposure, FX, limit credit growth

The economic slowdown in Africa’s largest economy, following the sharp and elongated decline in oil prices has shown its face in the massive decline in banks’ quarter one earnings, BusinessDay analysis shows.

For the first three months, ending March 2016 the cumulative net income of 13 banks fell by 9.50 percent to N144.24 billion, as against N159.50 billion as at March 2015.

Also, combined interest income was down by 10.73 percent, as interest on loans and advances slowed on economic lethargy.

Besides, the rising non performing loans (NPLs) and spiraling loan loss expense, occasioned by regulatory headwinds, have become a source of worry to the regulatory authorities.

These unimpressive performances  validate analysts expectations  that 2016 will be tough for lenders as they grapple with exposure to the oil and gas industry and slow manufacturing activities which spiralled impairment charges on financial assets.

“When you look at business activities in the first quarter, it has been challenging. This has limited the ability of banks to any lending opportunities,”  said Ayodeji Ebo, head research and advisory, at Afrivest, by phone.

“With the FX challenges, banks are occupied with trying to restructure some of the loans. As a result, they will be wary of the exposure to some of the affected sectors,” said Ebo.

The Central Bank of Africa’s most populous nation has restricted dollar sales to lenders as it seeks to curb inflation and stop the reserve from continuous depletion due to a sharp fall in oil price.

The policy is however causing ing a liquidity squeeze and hurting the profit of banks.

Growth in Nigeria slowed to 2.8 percent last year, the weakest level since 1999 and down from 6.2 percent recorded in 2014. Inflation has risen to 12.80 percent in March, as against 11.40 percent as at February, according to the National Bureau of Statistics (NBS).

Reserves have fallen from $37 billion since before the oil price crash, to about $28 billion, as the Central Bank has attempted to defend the naira.

These banks had impairment on financial risk assets, otherwise known as loan loss expenses, which increased by 35.11 percent to N35.22 billion, fuelled  by huge write-offs since a tough and unpredictable environment makes it practically difficult for customers to honour obligation as at when due.

Analysts say loan loss expenses are critical in assessing financial system stability, as they are a key contributor to fluctuations in banks’ profitability and capital positions. This has a bearing on banks’ supply of credit to the economy. Lenders in Africa’s largest oil producer are increasingly exposed to oil and gas, as Non Performing Loans (NPLs) takes spiked, raising concerns about their risk asset management strategies.

First Bank Holding Plc’s NPL hits 22 percent in the first quarter, a figure that has crossed the 5 percent threshold. Banks lent to oil and gas companies when oil prices were favourable but a sudden drop in the price of the commodity made collateralised assets lose value. Oil accounts for two thirds of government revenue and 90 percent of foreign exchange earnings.

“If corporates are not doing well as they used to do and they are not able to pay their loans, it is not something unusual to see the NPLs rising. The average figure of five per cent NPL is not out of this world.” said Tokunbo Martins, CBN’s Director of Banking Supervision.

The contentious issue bank analysts are increasingly pondering is the possible impact of a devaluation of the currency on lender’s balance sheets, since some have the large chunk of their loan portfolio in foreign currency.

“This is three-fold for the banks: 1) capital, 2) FX income and 3) asset quality. On our estimates, GTBank, FCMB and Zenith’s capital adequacy ratios (CARs) are the most sensitive to a weaker naira,” said Adesoji Solanke, head of research at Renaissance Capital Limited, in a recent note.

“But FBNH, Skye, Ecobank Nigeria (not covered) and FCMB would probably be quickest to breach minimum CAR requirements and feel the pressure to raise capital,” said Solanke.

BussinessDay calculations show lenders have become less aggressive to lending, as loans to deposit ratio increased by a mere 11 basis points, to N69.23 percent, while loans and advances stagnated at N12.41 trillion. Combined deposits to customers of the 13 banks were also flattish as at N18 trillion.

With the next inflation figures expected to be high on the back of the hike in transport fares caused by fuel scarcity and spiralling food prices, analysts say the CBN will hike interest rate to curb inflation.

“Fast Moving Consumable Goods (FMCG) also experienced significant bottlenecks that contributed to the ballooning impairment charge,” said Ebo.