Shareholders brace up as economic headwinds expected in 2015 bank earnings

As the nation awaits the release of the year-end financials from this week, there are worries over the likely poor outings by the banks, BusinessDay interactions with industry operators have shown.

There are also indications that as the global macro shocks continue to expose the structural imbalance of Africa’s largest economy, the disappointing results will be occasioned by foreign exchange related financial losses, which some analysts say constitute a major snag to their corporate earnings.

Exposures to the oil and gas sector, which an analyst says is responsible for over 40 percent in some banks, has impacted negatively on their earnings, particularly with the decline in the price of oil in the international market.

The implementation of the Treasury Single Account (TSA) is said to have also drained idle funds that banks could turn to and also stopped cheap and easy profits.

While some banks have commenced downsizing exercises, others are planning to prune down their staff in a bid to cut overheads.  Already, profit depression warnings have been announced by two major banks, with First Bank of Nigeria Plc, (FBN) declaring last week that there would be a decline in its earnings in the financial results being finalised for public presentation any moment from now.

First City Monument Bank Plc, (FCMB) had come out earlier with a similar warning last month, followed with the announcement of its 2015 nine months results, showing a massive drop in profit.      

FBN had attributed the development to a worsening macroeconomic environment, as well as inclement monetary and fiscal policy, which prevailed since mid last year.

Company secretary, Tijani Borodo, stated in a letter to the Stock Exchange: “Following the preliminary review of FBN Holdings Plc management accounts for the year ended December 31 2015, it is expected that earnings will be materially below that of the prior year.

“The reduction in earnings is as a result of the recognition of impairment charges on some specific accounts resulting from a reassessment of the loan portfolio within our commercial banking business. This reassessment was driven by the challenging macroeconomic environment, coupled with fiscal and monetary headwinds, which have resulted in marked reduction in domestic output,” the statement, added.

Analysts at Renaissance Capital (Rencap), had earlier spoken of their concerns about the industry’s near term earnings outlook in their Nigerian banks’ report, ‘Navigating stormy seas’.

They said while there were some positive developments, they had concerns about asset quality and fixing the risk writing culture across multiple fronts. They further added that capital adequacy remained another concern and that while  banks may keep wading through with austere measures, capital raise would need to happen at some point to help support future growth and keep  banks  competitive.

They further observed that the oil & gas issues the banks were flagging were legacy problems and not symptomatic of an ongoing classification of syndicated loans in the sector just yet.

They noted that these were downstream loans and not upstream/services and that there were the characteristic issue of auditors taking tougher stances on NPLs.   

BusinessDay further gathered that the possibility of banks’ non performing loans, exceeding the five percent threshold is high, a development that may cause some anxious moments in the industry, following the recent declaration by the Assets Management Corporation of Nigeria (AMCON) that it will no longer purchase bad loans.

Bismarck Rewane of Financial Derivatives Company, in his economic and business update for last month observed that the lowering of interest rates have not translated into more loans because loans are a function of risk and liquidity and not of lower interest rates alone.

“This industry in 2016 will be under margin compression pressure. The final removal of COT and the Single Treasury Account will wipe out at least 20% of revenues. This, combined with the slash in forex availability means that trade finance activity will nose dive.

“Therefore, it is imminent that banks might have to slash their workforce and compensation. This will become even more pressing because of the loan quality problems now plaguing the industry. Attempts to recapitalise will be difficult and futile because of the slump in share prices of banks.

Therefore, this will be a tough year for banks,” Rewane said.    

Friday Ameh, energy analyst said that the poor outing of the banks should be a matter of concern to everybody since, “they (banks) control significant shares on the Nigerian Stock Exchange and also, shareholders depend on them for their dividend payout.   

Besides, Ameh said, “While the falling oil price increases Nigerian companies’ debt servicing costs, they are also faced with FX related losses which results from multiple exchange rate being operated in the country as at today.”

John Omachonu