Tier 1 banks’ loans up by 9% amid high exposure risk

The tier 1 banks in Nigeria, in no particular order – Access Bank, First Bank Nigeria, Guaranty Trust Bank (GTB), United Bank for Africa (UBA) and Zenith Bank Plc grew their combined loan portfolio for the period ended June 30, 2020, by 9 per cent from N11.54 trillion in FY 2019 to N12.6 trillion at half year 2020 despite the challenging business environment and economic uncertainty occasioned by the novel coronavirus which almost halted the world’s economic activities.

The pandemic poses a serious threat to the world’s economy, the impact of this can be evidenced on the pressures that characterized Nigeria’s external sector and the increasing burden in the global financial market which threaten its stability.

More so, the impact of this on the financial service sector will likely aid the declining trend in the banks’ non-performing loan ratio, because a major chunk of the banks’ loans goes to the oil and gas sector, which represents 29 per cent of the gross loan to private sectors. And again, the banks’ balance-sheet dollardominated exposures, which represented 38 per cent of the banks’ loans portfolio and 55 per cent of their liabilities at the end of 2019, would also be a source of tension because of exchange rate volatility, according to the World Bank Nigeria Development Update released in August 2020.

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An assessment of the pandemic on the financial service sector using the tier 1 banks as a case study (because they account for half of the banking sector’s total assets) shows that the health crisis dealt heavily a major blow on the Loan-to-deposit Ratio (LDR) as the banks struggled to keep up with the Central Bank of Nigeria’s LDR measures which were stipulated to facilitate the provision of credit facilities to the real sector of the economy

The CBN incentives assigned a weight of 150 per cent in respect of lending to SMES, retail, mortgage, and consumer lending. Lenders are required to fully comply or risk attracting a levy of additional Cash Reserves Requirements (CRR) of 50 per cent of the lending shortfall of the target LDR.

For the period under review, Access Bank increased its loans and advances portfolio by 11 per cent from N3.06 trillion in 2019 to N3.39 trillion in June 2020. Deposit for the period up by 10 per cent from N5.44 trillion to N5.99 trillion at the end of June 2020.

The bank’s loan to deposit ration was 57 per cent loan which was slightly below the threshold of 65 per cent.

Similarly, FBN book of account shows a 6 per cent increase in loan portfolio from N2.61 trillion in FY 2019 to N2.76 trillion at the end of June 2020 while LDR for the reference period stood at 50 per cent. In the same manner, GTB’S loan for the period increased by 8 per cent from N1.50 trillion in FY 2019 to N1.62 trillion in June 2020 whereas LDR stood at 53 per cent.

UBA, for the period under review, its disbursement of loans to customers increased by 6 per cent from N2.06 trillion in FY 2019 to N2.19 trillion in June 2020; Zenith Bank’s loans were up by 14 per cent, from N2.06 trillion in FY 2019 to N2.19 trillion in June 2020, and highest for the period while UBA and Zenith Bank’s LDR for the reference period stood at 41 per cent and 54 per cent respectively.

In July 2019, the CBN increased banks’ LDR to 60 per cent from 58.5 per cent. Three months down the line, and in a bid to foster economic growth through injection of sufficient credit into the real sector of the economy, the apex bank raised the threshold to 65 per cent. The economic downturn among other factors chiefly caused the banks not to meet up with the threshold.

However, an insight of from CBN Economic Report, Sectoral Utilisation of Credit portfolio shows an improved feat. Following the implementation of the loan-to-deposit ratio (LDR) policy and the increased demand for loans by SMES, credit to the private sector soared in August 2020. Bank credit to the private sector grew by 11.7 per cent in August, compared with 11.4 per cent in July. The development was due to an uptick in economic activities, as shown by a rise in PMI to 48.5 index points at end of August 2020, compared with 44.9 index points at end-july 2020 and growing household demand. Sectoral credit utilisation by the other sectors of the economy, at N19,246.13 billion, credit to the private sector over the years has been relatively low but rose by 0.7 per cent at end of August 2020, above its level at the end of July 2020.

The breakdown of the credit showed that the industry and services sectors constituted 37.9 per cent apiece of the total disbursement, compared with 38.1 per cent and 37.8 per cent, respectively, in July 2020. The agricultural sector accounted for 4.8 per cent at end-august 2020, below 4.9 per cent in July 2020, while construction and government sectors increased by 0.1 percentage point apiece to 4.7 per cent and 8.1 per cent, respectively, in August 2020.

The report also shows that credit to the private sector was relatively stagnant at N30.13 trillion at the end of August, slightly higher by 0.24 per cent when compared with the N30.06 trillion in July as effects of the lockdown constrained economic activity.

Concentration analysis of the loan portfolio reveals that oil and gas maintained the lead share with 36 per cent at the end of June 2020 while 64 per cent of the remainder was shared among other sectors. By extension, NPL might trend upward due to the collapse of oil prices among other factors. If the pandemic persists, the Nigerian economy according to World Bank’s projection, might contract by 7.4 per cent with the recession extended into next year, and this will play an adverse effect on the banks’ loan portfolio.