Out of seven listed Nigerian banks, Guaranty Trust Holding Company (GTCO) Plc, United Bank for Africa (UBA) Plc, and Zenith Bank Plc recorded the highest growth in impairment charges last year, according to data compiled by BusinessDay.
The lenders’ latest financial statements show that GTCO recorded 765 percent growth in impairment charge, followed by UBA with 632 percent, Zenith Bank (232 percent), FBN Holdings Plc (192 percent) and FCMB Group Plc (166 percent). Wema Plc and Stanbic IBTC Plc had 121.8 percent and 50.1 percent increases respectively.
Further analysis of the financials revealed that the commercial banks recorded a combined impairment charge of N949.3 billion last year, a 260.9 percent increase from N263 billion in 2022.
A loan is impaired when it is not likely the lender will be able to collect its full value as it is not performing according to the original terms of the agreement. It is a type of credit impairment with others such as credit deterioration risks and loan losses.
“Devaluation of the currency meant foreign currency impairments grew. Some banks also made prudent provisions taking advantage of the windfall revaluation gains,” Gloria Fadipe, head of research at FCMB, said.
Olumide Sole, bank analyst at Vetiva Capital Management Limited, said the surge in banks’ impairment charges shows the fragile state of the Nigerian economy.
“The economy has passed through macroeconomic shocks with the policy reforms put in place by the new administration.”
He said the implication of the increase in impairments charges for banks is that it eats into banks’ profitability.
Last year, Fitch Ratings, a global credit rating agency, said Nigerian banks will see a jump in impaired loans as rising inflation and interest rates burden borrowers’ debt servicing capacity.
It said the devaluation of the naira and the fuel subsidy removal will lead to higher near-term inflation and tighter monetary policy, which will in turn constrain economic growth.
“These developments exert downward pressure on capital ratios and will cause impaired loan ratios to rise higher than previously envisaged.”
The rating agency said since the devaluation, it has affirmed the ‘B-’ long-term issuer default ratings of the vast majority of Nigerian banks, with stable outlooks.
“This reflects the banks’ sufficient headroom above their minimum total capital adequacy ratio requirements to absorb the negative impact of the devaluation and the second-order economic effects of the reforms on asset quality,” Fitch said.
The benchmark interest rate, also known as the monetary policy rate, has been raised by 725 basis points to 18.75 percent in May last year from 11.50 percent in April 2022.
Last month, the CBN raised the MPR for the second straight time by 200 basis points to 24.75 percent in a bid to fight inflation. In February, the apex bank increased the interest rate by 400 basis points to 22.75 percent.
Since President Bola Tinubu announced the removal of petrol subsidies during his inauguration on May 29, petrol prices have more than tripled to N600, while the value of the naira has plunged following the floating of the currency.
The apex bank last June merged all segments of the foreign exchange market into the Investors and Exporters window and reintroduced the willing buyer, willing seller model.
The official exchange rate fell from N463.38/$ to N1,136.0/$ as of Monday. At the parallel market, the naira is being traded at around 1,120/$ as against 762/$ before the FX reform.
In terms of value, Zenith recorded the highest impairment charge of N409.6 billion, followed by FBN Holdings with N200.4 billion, UBA had N144.1 billion, Access Holdings (N139.5 billion), and GTCO (N102.9 billion).
“Most banks are being proactive by booking higher impairment charges due to exposure to businesses who may likely struggle to repay loans due to higher interest rate environment and rising macroeconomic challenges,” Nabila Mohammed, research analyst at Chapel Hill Denham, said.
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