A new financial reporting standard that forces banks to make new provisions for loans that were hitherto not recognised, is taking its toll on lenders’ shareholder equity, even though they look well buffered to weather a storm.
The new rule, as prescribed by the International Financial Reporting Standards (IFRS), peeled N438 billion off the retained earnings or regulatory reserves (components of shareholder equity) of the seven banks that have published financial statements for the first quarter of 2018, according to data compiled by BusinessDay.
Shareholders’ equity is equal to a firm’s total assets minus its total liabilities and represents the net value of a company, or the amount that would be returned to shareholders if all the company’s assets were liquidated and all its debts repaid.
For banks more shareholders’ equity is ideal because even though it may lower return on equity (RoE) , it means a bigger margin of safety in the event losses develop in the loan book; more equity to absorb bad debts that aren’t repaid either due to poor underwriting or a general economic recession like Nigeria has witnessed lately.
The seven banks are Access bank, Zenith, Guaranty Trust, First Bank holdings, United Bank for Africa, Stanbic Ibtc and First City Monumental bank.
The implementation of IFRS 9 was tipped to see local banks cut down the size of their credit to the private sector, as they struggle to protect their books from the impact of making provisions for bad and doubtful loans.
Zenith restated its equity opening balance downward by 16.8 percent (N138 billion) to N683.4 billion in Q1, on implementation of the IFRS 9 which took effect January 1, 2018.
The lender passed the charge solely through retained earnings and did not share it with regulatory reserve, causing its Capital Adequacy Ratio (CAR) to slump by 710 basis points to 19.9 percent, since regulatory capital is typically excluded in the computation of CAR.
A N28.8 billion drawdown from regulatory reserves and N44.6 billion in retained earnings, made up for the N73 billion hit taken by Access bank on adoption of the new rule.
In the three month period of 2018, Access bank’s equity declined by 11.8 percent to N454.4 billion.
Capital adequacy ratio, however, was at 19.3 percent, 430basis points higher than the regulatory minimum, in a sign of strong capital buffers.
Guaranty Trust Bank (GTB) took a charge of N131.7 billion, by tapping N52.3 billion from regulatory risk reserve and N79.7 billion through retained earnings.
This brought the lender’s 2018 opening equity value down by 21.6 percent from N625.2billion in FY’17 to N490.3 billion in January 1, 2018.
However, GTB’s equity improved to N535.1 billion following the capitalization of Q1’18 profits.
Although GTBs capital adequacy ratio (CAR) took a hit, moderating by 110bps to 24.6 percent in Q1’18, it remains sufficiently above the regulatory required minimum of 15 percent.
First bank holdings (FBNH), the second largest bank by assets, saw a N36.1 billion haircut and it was taken through the bank’s retained earnings.
FBNH’s capital adequacy ratio improved by 0.2 pts to 18 percent and its total comprehensive income of N17.7 billion provided buffers in the quarter, as total equity only moderated by 2.7 percent to N659.8 billion.
For United Bank for Africa (UBA), the IFRS adoption saw the bank restate its opening equity balance downwards by N34.0 billion.
However, UBA’s equity increased marginally by 1.5 percent year to date to N537.6 billion at the end of Q1’18, as the bank consolidated its total comprehensive income of N35.0 billion for the period.
Stanbic Ibtc holding’s IFRS 9 adjustment to equity was not material, as it only shaved off N10.2 billion from retained earnings opening balance as at January 1 2018.
This explains the minimal impact on CAR observed in the period, as the ratio improved to 24.7 percent compared to 23.5 percent reported in 2017.
First City Monument bank took a shave worth N15.2 billion, having made a 6.6 percent equity adjustment to N176.5 billion in the first quarter, in line with the IFRS 9 implementation.
The lender’s Capital adequacy ratio however remains sufficiently above the regulatory minimum at 18.1 percent.
The banking index was up 0.43 percent on the last trading day on Monday, according to Bloomberg data.
IFRS 9, which was approved by the International Accounting Standards Board (IASB) in 2008, became operational on January 1, 2018.
It requires commercial lenders to change their impairment model from backward looking to forward looking.
The implementation of IFRS 9, means banks would now have to make provisions for excess credit loss rather than incurred loss.
The new policy wants them to take into account their operating environments in making bad debt provisions.
“The application of these new rules means loans that had escaped classification as non performing loans (NPLs) may now be classified which would sour bad loan books,” said Kunle Ezun, research economist at Ecobank Nigeria Limited.
Renaissance Capital, an investment banking firm, in a note this month said banks could see their 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.
LOLADE AKINMURELE
