Nigeria’s largest banks, otherwise known as tier-1 lenders, recorded mixed exposure to the oil and gas sector despite a sustained increase in crude oil price seen in the first half of this year after initial market instability, as well as a recession that was caused by a collapse in oil prices in 2014.
BusinessDay analysed oil exposure of the five largest Nigerian banks – FBN Holdings, Zenith Bank, Guaranty Trust Bank, United Bank for Africa, and Access Bank – using the average exchange rate of $358.79 in first half (H1) 2019 and $344.94 in H1 2018.
Guaranty Trust Bank (GTB), Access Bank and United Bank of Africa (UBA) increased their exposure to the oil and gas sector by 6 percent, 71 percent and 50 percent, respectively, while First Bank and Zenith Bank reduced their exposure by 26 percent and 23 percent, respectively.
In first quarter 2019, GTB loans to oil and gas sector increased by 6 percent to $1.39 billion (N499 billion), from $1.30 billion (N449 billion) in H1 2018, while Access Bank increased its loans to oil and gas sector by 71 percent to $2.4 billion (N865 billion), from $1.4 billion (N482 billion) in H1 2018.
Also, UBA increased its loan to the oil and gas sector by 50 percent to $1.4 billion (N359 billion), from $930 million (N321 billion).
Further calculations showed First Bank loans to oil and gas sector reduced by 26 percent to $1.5 billion (N554 billion), from $2.04 billion (N702 billion) in the half year 2018 period, while Zenith Bank reduced its loans to the oil and gas sector by 23 percent to $1.013 billion in first half of 2019, from $1.32 billion in the corresponding period last year.
“The reason for the mixed reactions is because some of the banks have dominant customers in either the upstream, downstream or midstream sector of the oil and gas sector. However, each bank will respond based on their risk acceptance criteria,” said Johnson Chukwu, managing director and CEO, Cowry Assets Management Ltd.
“Some of the tier one banks will increase their loan books to their clients in the upstream sector which has remained strong with crude oil trading around $60, while those with clients in the downstream will reduce their exposure to the sector,” he said.
Chukwu noted that the macroeconomic environment, activities in the oil and gas sector and oil price are factors that will determine the positioning of the banks going forward.
“The banks increasing their loans in the oil and gas sector will most likely be increasing in the upstream sector because of the fairly stable outlook for oil price and relative stability in the Niger Delta which put upstream in a favourable condition while the reverse is the case for the downstream sector,” Gbolahan Ologunro, a research analyst at Lagos-based CSL stockbrokers, said.
“Also, in the course of trying to restructure banks’ loans, some of the bank debtors might require banks to make some injections which they might use to stabilise their business which the debtors can use to generate cash flow to service the increasing debt burden or solve their working capital issues,” he said.
With the recent happenings in the oil sector, Ologunro said banks ought to be more cautious in creating risk assets.
“For banks with legacy issues, loan growth will remain muted in the short-to-medium term,” he said.
Adetola Adelu, financial analyst at Fides Capital Partners, said the oil and gas sector is generally a favourable sector which in most cases makes loan applications from the sector less rigorous because they often get favourable ratings.
Adelu said although most of the players in the oil industry often have a high liquidity ratio, their long-term solvency ratio, interest coverage and value of productive asset matter as well.
Loan exposure by sectors
GTB loans to oil and gas upstream increased to 25 percent from 21.3 percent in H1 2018. Loans to oil and gas midstream increased to 15 percent in H1 2019 from 13.4 percent in H1 2018, while loans to oil and gas downstream increased to 4 percent from 3.8 percent in H1 2018.
After its merger with Diamond Bank, Access Bank half-year 2019 financial report revealed loans to oil and gas upstream increased to 8.7 percent from 7.1 percent in H1 2018, loans to oil and gas downstream increased to 4.8 percent from 4.7 percent in H1 2018, while oil and gas services increased to 14.7 percent from 11.2 percent in H1 2018.
Zenith Bank’s half-year 2019 financial report revealed loans to oil and gas upstream remained at 16.7 percent just like H1 2018, while loans to downstream sector reduced to 11.1 percent from 13.2 percent in H1 2018.
UBA’s H1 2019 results show loans to oil and gas sector increased to 21 percent from 19 percent in H1 2019. The bank does not have a breakdown of its loan to the oil and gas sector.
First Bank Holdings’ loans to oil and gas downstream increased to 11.3 percent from 9.7 percent in H1 2018, loans to oil and gas services increased to 7.7 percent from 6.5 percent in H1 2018, while loans to oil and gas upstream reduced to 15.8 percent in H1 2019 from 23.2 percent.
Going forward
Fitch Rating said in a new report that “Nigerian banks have suffered from high credit losses in recent years, particularly from their exposure to the oil and gas sector”.
Fitch is also forecasting a 10 percent loan growth for 2019 in light of the Central Bank of Nigeria’s recent move to incentivise lending by requiring banks to have a loan-to-deposit ratio of at least 60 percent at end-September 2019.
“We will monitor how lending develops in 3Q19 at the sector level and at individual banks. Excessive loan growth, particularly relative to the market average, or other signs that a bank’s risk profile may be deteriorating, could lead to negative rating action,” Fitch said.
The National Bureau of Statistics (NBS) in April released data showing Nigeria’s deposit money banks’ domestic component exposure to the oil and gas industry was to the tune of N1.86 trillion, 39.70 percent of a total loan portfolio of N4.68 trillion to the sector. This leaves foreign component exposure to account for 60.3 percent (N2.82 trillion).
Evident in the NBS bank credit report for Q1 2019 is the fact that Nigerian banks are more exposed to the oil and gas sector than any other sector of the economy. In Q1 2019, credit to the sector accounted for 22.96 percent (N3.49 trillion) of banks’ total credit to the private sector, hence opening up the industry to shocks in crude oil prices which is in nature very volatile.
Sequel to the above report of banks’ credit by the NBS in April, crude oil price in the global market had slumped about 25 percent from highest peak of the year at $74.57 in April. This has seen Nigeria’s upstream oil and gas companies’ share price trend downwards to their year-low coupled with prevailing negative market sentiment.
DIPO OLADEHINDE
