Industry analysts are worried that risk managers in the banking sector might get complacent with new loans to be created before September on the back of the new Loan to Deposit Ratio regulations. The need to maintain a Loan to Deposit ratio not less than 60 percent could push the total non-performing loans in the banking industry above N1.62 trillion if the industry NPL ratio remains at current level by year end.
Analyses of the Q1 Banking financials show that there is a deficit of N1.84 trillion loans that would need to be created by 8 banks before September. When these loans are created, the total banking industry loans to customers would grow from N15.5 trillion to N17.34 trillion. If the current NPL ratio of all the commercial banks listed on the stock exchange remain at 9.36 percent at the beginning of Q3, 2019, that would mean a total industry non-performing loan of N1.62 trillion.
Obinna Uzoma, a Lagos based economist explained that, “The regulations would bolster fresh capital supply to the real sector but this would have to be done before September so there is a likelihood of complacency by risk managers. If that is properly managed, the loan book of banks would rise as against the downward trend over the last few years and lead to improved profitability, but if the NPLs are not carefully managed, these banks could report weaker earnings”
Access Bank, United Bank of Africa, Guaranty Trust Bank, and Wema Bank are the banks to watch in the next two quarters as they are the banks that need to give out the most loans while trying to put their NPL ratio below the regulatory limit of 5 percent. As at the end of the first quarter of the year, Access Bank reported an NPL ratio of 10 percent and an LDR of 52.8 percent, Herbert Wigwe and his team would need to add over N280.26 billion in loans while trying to cut the NPL ratio by 500 basis points.
United Bank of Africa reported an NPL ratio 5.3 percent, slightly above the regulatory limit but with the new LDR target, the bank has to create over N400 billion in loans before September to keep up with new regulations. This might push the NPLs further away from the regulatory benchmark if the risk protocol in issuing out new loans is compromised.
Guaranty Trust Bank recorded an NPL ratio of 7.03 percent in the first quarter of the year and has to create new loans N216.93 billion. Wema Bank is also slightly within the regulatory target, but has to create N230 billion new loans.
“The recent selloff after the announcement of the regulation shows that investors are skeptical about the banks’ ability to manage these risks and maintain or grow profitability” Uzoma added.