Nigerian banks are facing a challenging operating environment that is being compounded by macro uncertainty from some government policy actions.
The country’s financial services sector was hammered lately, after the Central Bank of Nigeria (CBN)dissolved the management team of Skye Bank for failing to meet minimum thresholds in critical prudential and adequacy ratios.
Various sources interviewed by BusinessDay for this article, say the problem facing banks may actually be deeper and more complex than the authorities are willing to disclose.
“The government is the biggest spender in this peculiar economic milieu. If therefore, the government significantly reduces its capital expenditure, owing to lack of a budget or delay in budget execution, all sectors, including the banking sector, suffer. This has been the situation in the last one year,” one source speaking on condition of anonymity, told BusinessDay.
Nigerian banks have been hit by a myriad of shocks, including late passage of the budget that failed to inject timely fiscal stimulus into the economy to boost growth, large debts owed by the Government to contractors, who in turn were unable to service loans obtained from banks, the Treasury Single Account (TSA) which was well intentioned but pulled liquidity out of the system, delay in unveiling the new foreign exchange (FX) policy by monetary authorities that some say compounded the economic crises, and finally lack of movement on reforms in sectors such as power and downstream oil and gas, in which most banks are heavily exposed.
Nigerian banks had average Non Performing Loan (NPL) ratios of about 6.2 percent at end-March 2016.
Fitch Ratings recently downgraded the Long-Term Foreign Currency Issuer Default Ratings (IDRs) of two Nigerian banks, following the downgrade of Nigeria’s sovereign ratings, showing the link between the sovereign and Financials.
“We expect loan impairments to rise in the wake of the naira devaluation. Devaluation will primarily affect those Nigerian companies that are not adequately hedged by foreign currency income streams, and which will find it more difficult to service their foreign currency loans at the current exchange rate,” Fitch said.
Sources tell BusinessDay that while a cyclical downturn was always expected to impact banks negatively, it seems Government’s actions and inactions probably made the situation worse than it should have been.
“Yes, government actions and inactions typically affect the health of banks, which are the ‘engine-room’ of growth in any economy, given their financial intermediation roles. However, beyond governments direct and indirect culpability, some banks have weak corporate governance structures which make them typically more vulnerable during cyclical downturns,” said Oluwatosin Ojo, head of research at investment firm, Cardinal Stone Partners, in response to questions.
Nigeria’s economy contracted by 0.4 percent in the first quarter of 2016 the first time it has happened since 2004.
Higher inflation and slowing growth means Nigeria’s economy will probably contract this year, according to the International Monetary Fund (IMF).
Standards & Poor’s (S&P) after downgrading Nigeria’s sovereign credit outlook to negative, said“Nigeria’s monetary policy has also weakened the country’s credit profile, in our view.”
Moody’s investor Services, another ratings agency, downgraded some Nigerian banks in May, on the “weakened capacity of the government to provide support to the banks in times of stress, as implied by the downgrade of the sovereign issuer rating to B1, stable, and the lowering of the rating ceilings for Nigerian issuers.”
The huge domestic debt to contractors, put at close to N11 trillion has compounded the banking sector illiquidity, with just one Federal Government agency, the Niger Delta Development Commission, (NDDC), owing over 8,000 contractors about N450 billion, according to its MD, Ibim Semenitari.
In the case of Skye Bank, sources tell BusinessDay that stress from the macro environment and poor takeover timing by the former management, mostly led to the bank’s liquidity issues.
The bank’s problem is not peculiar and the way and manner the regulator has handled it will only erode confidence in that sector. This is the 21st Century, no one sacks the way it was done in a fragile sector any longer,”said the financial analyst.
Skye Bank undertook multiple attempts at raising capital which were unsuccessful, as it tried to beef up its capital adequacy ratio (CAR), which stood well above minimum requirements at 17.3 percent in the third quarter of 2015.
“We think there must have been significant erosion in the bank’s capital position for the CBN to have intervened in such a manner. For this to be the case, we suspect the bank probably recorded a material loss position in FY15; post Mainstreet audited and full consolidation,” Adesoji Solanke, banking analyst at Renaissance Capital, said in a July 4 note to investors.
Sources tell BusinessDay that Skye Bank may have spent over N130 billion to acquire Mainstreet Bank to strengthen its operations and widen its scope.
“It had not recovered fully from that great but costly venture, when TSA happened, thereby wiping out over N200 billion from its system. How will this unforeseen development not erode its capital and liquidity ratios?” another source asked.
BusinessDay has also learnt that the challenge the sector faces may have been compounded by the lack of movement in reforms of the power sector.
Many analysts said government policies or the lack of them have negatively impacted seriously on the banking sector in the last one year, adding that the government urgently needs to reflate the economy, meet up with its obligations to local contractors and others that are owed huge amount of funds. Banks are in pain. It is the only way to bring succor to the nation’s financial sector and restore it to sound health,” analysts said.
“It is an open secret that Skye Bank availed one of the DISCOs facilities for its operation. As at today, the government owes DISCOs over N100 billion in unsettled electricity bills. If that huge indebtedness was settled, would that not make much difference in the financial status of the bank?” the source asked.
PATRICK ATUANYA
