Low yields push Nigerian banks to expand loan books

Some Nigerian banks are aggressively looking to expand their loan books, making it a key performance indicator (KPI) for their relationship officers who are constantly reaching out to individual and corporate customers.

This new push by Nigerian lenders comes despite the Covid-19 pandemic, which has pressured many businesses into not meeting up with their loans repayment obligations.
“Banks are forced to create loans to avoid the punitive Cash Reserve Ratio (CRR) regime and also preserve profitability as yield on treasuries remains at single digit,” a banker with one of the Tier-1 lenders told BusinessDay on phone.

The Central Bank of Nigeria (CBN) had in its latest disciplinary measures last month hit deposit money banks with a debit of N321.6 billion in CRR related requisitions. The CRR is the minimum amount banks are expected to retain with the CBN from customer deposits.

In January, the CRR was increased by 500 basis points to 27.5 percent by the CBN Monetary Policy Committee (MPC) in line with the decision of the apex bank to address monetary-induced inflation while retaining the benefits from the CBN’s loan-to-deposit ratio (LDR) policy.

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The CBN increased the minimum loan-to-deposit ratio (LDR) of commercial banks to 65 percent, a measure that was among a range of regulations aimed at forcing banks to boost credit, mainly to farmers, small-and-medium-size businesses and consumers. “It is pertinent to note that the appetite of banks for risk assets is a function of liquidity in the banking sector.

If the uptake of risk assets is on the rise, then it appears in sync with the CBN’s recent regulatory posture aimed at increasing credit flow in the economy.

“Specifically, the LDR of 65 percent as well as the recent lowering of the minimum threshold for interest rate on savings deposits to 10 percent of Monetary Policy Rate (MPR) are measures capable of increasing the size of risk assets in the banking industry,” said Uche Uwaleke, a professor of capital market, Nasarawa State University Keffi.

He noted further, “Without a doubt, increased credit especially to the real sector of the economy is desirable. But it is equally important to ensure that the uptake in loans or risk assets does not translate into increase in non-performing loans (NPLs). To this end, the CBN should continue to ensure through effective supervision that deposit money banks (DMBs) follow all credit guidelines in relation to their customers and are not over exposed to the point of jeopardising their asset quality.”

The Nigerian economy contracted 6.10 percent year-on-year (y/y) in second quarter (Q2) of 2020, mainly due to the Covid-19 lockdown in major cities across the country.

With all banks’ half-year (H1) results finally released, Vetiva analysts say they sought to ascertain the net effect of the economic slump on the performance of banks within their coverage.

“As a result of the shutdown, many businesses were unable to carry out activities to generate income; this meant an increase in default risk on loans given out by banks amid the minimum loan to deposit ratio (LDR) regulation set by the CBN,” Joshua Odebisi, analyst at Lagos-based Vetiva said in a September 14 note.

Nigerian bank loans are not cheaper either. Banks commercial loan interest rate ranges between 19 percent and 25 percent. The interest rate for on-lending facilities like that of Bank of Industry (BoI) is 13 percent; Development Bank of Nigeria (DBN) is 14.6 percent for 3 years and below, and 16.6 percent for facilities above 3 years; while the on-lending facility of African Development Bank (AfDB) goes at an interest rate of 13.5 percent.

The National Bureau of Statistics (NBS) on Tuesday, September 15, released the inflation figures for August 2020. Notably, the headline inflation rate rose from 12.82 percent year-on-year (y/y) in July to 13.22 percent y/y in August – the highest since April 2018, driven by a 1.34-percent jump in the month-on-month (m/m) changes in general prices (versus 1.25% m/m in July 2020).

NBS data show that out of the N18.9 trillion gross loans of banks as at Q2 2020, the NPLs stood at N1.21 trillion; this is against gross loans of N15.48 trillion and NPLs of N1.44 trillion in Q2 2019. In Q1 20 banks gross loans stood at N18.56 trillion and NPLs printed at N1.185 trillion in Q1’20.

In terms of credit to private sector, the total value of credit allocated by the banks stood at N18.82 trillion as at Q2 2020. Oil and Gas and Manufacturing sectors got credit allocation of N3.62 trillion and N3.07 trillion to record the highest credit allocation as at the period under review.’

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Looking at the Tier-1 lenders results for the half-year to June 30, Access Bank NPL ratio improved to 4.4 percent in Q2 20 (previously 5.8%). Zenith Bank asset quality concerns appear to be under control with NPL ratio at 4.7 percent. FBN Holdings NPL ratio has remained in single digit and continues to decline to 8.8 percent from 9.9 percent at year-end. UBA maintains its prudent risk appetite, even as NPL ratio for the Group moderated to 4.1 percent (from 5.3% in 2019 full year.

NBS also notes in its quarterly sectoral change in NPLs that agriculture, finance and insurance, information and communication, professional, scientific and technical activities, and real estate contributed majorly to the 2.27 percent growth in NPLs from Q1 to Q2, 2020. Looking forward, the analysts note they do not expect a significant worsening of NPLs in 2020 “due to the expected recovery in economic activity, rebound in crude prices and the restructuring.

“Among our coverage banks, loan loss provisions went up 115 percent quarter-on-quarter (q/q), with two banks bearing the brunt of the effect in nominal terms – Zenith Bank and FBN Holdings – both reported provisions of N20 billion in Q2 alone. Even banks with historically low provisions reported extraordinary surges q/q such as GTBank (+353% q/q; Q2: N5.5bn) and Stanbic (+126% q/q; Q2: N4.4bn),” Vetiva Research analysts note.

“However, this surge in provisions was actually not the worst case scenario, thanks to the approval of the CBN for the restructuring of about 40 percent of industry loan book (about N7.5trn), which meant that a large proportion of Stage 2 (Doubtful) loans were given new repayment tenures or different interest charges to ensure continued payment. Without this, industry provisioning would have likely been almost doubled the current figure. Thanks to this strategy, we do not expect provisions to worsen significantly in H2, as the economy continues to open up and business activities resume,” Vetiva says.