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Banks’ bad loans slide to 4yr-low as oil and gas firms come good

Nigerian bank costs remain elevated compared to Kenyan peers

Non-performing loans (NPLs) in the banking sector fell to a four year low in the third quarter of 2019 as oil and gas companies paid down stubborn debt.

Data released Tuesday by the National Bureau of Statistics (NBS) showed bad loans made up 6.67 percent of total gross loans extended by the banks in the third quarter of 2019. The first time it has collapsed to within single digits since 2015.

NPLs dropped over 50 percent to N1.103 trillion in the period from N2.24 trillion a year ago.

The recovery was driven by an improvement in non-performing loans to the oil and gas sector.

According to the NBS report, NPLs in the oil and gas sector dropped 278 percent to N264 billion in the third quarter of 2019 from N1.002 trillion in the third quarter of 2018.

This implies that the banks have recouped some N738.15 billion in non-performing oil and gas loans in the space of one year.

A big drop in the international price of crude oil in 2016 as well production disruptions caused by militant attacks on oil installations in the Niger-delta, had led to a surge in bad loans in Nigeria’s banking sector.

Nigerian banks were heavily exposed, and still are today albeit to a lesser degree, to the oil and gas sector. Oil and gas firms rose to become to hottest borrowers in an economy that was reliant on the sector for nearly 80 percent of its exports and 70 percent of government revenue.

Banks fell over one another to extend credit to the sector but the party came to an abrupt end after the lengthy collapse in oil prices.

Oil prices averaged $38 per barrel in 2016, the lowest in over a decade while production volumes were set back by almost a million barrels daily to 1.2 million barrels daily. That caused all sorts of problems for oil and gas firms with many defaulting on their loan obligations to the banks whose asset quality was fast deteriorating.

In the first quarter of 2016, bad loans as a percentage of gross loans doubled to 9.72 percent from 4.86 percent in the fourth quarter of 2015.

By the end of 2016, NPLs had surged to 12.8 percent, the highest since 2011, according to CBN data.

Bad loans would peak at 15.13 percent in the third quarter of 2017, but then began to cool as oil prices recovered and the militant attacks in the Niger-Delta that affected production abated.

The price of Brent crude averaged over $60 per barrel in 2018, almost double the price in 2016.

As at December 3, Brent for February settlement sold for $61.8 per barrel, as investors focused on the upcoming OPEC+ meeting that could lead to deeper supply cuts by some of the world’s biggest crude producers.

Banks are now sharing in the improved fortunes of oil and gas firms, which bodes well for their asset quality and frees up cash for more lending.

Banks also saw some improvement in the NPL portfolios of Power and Energy (N116.01 billion); Real Estate Activities (N74.02 billion); Manufacturing (N43.67 billion); Information and Communication (N39.40 billion), and Finance and Insurance (N34.42 billion).

Other sectors where NPLs reduced include Transportation and Storage (N32.27 billion); General (N26.42 billion); Scientific and Technical Activities (N5.19 billion); Mining and Quarrying (N2.69 billion); Art, Entertainment and Recreation (N2.36 billion); Human Health and Social Work Activities (N1 billion); Administrative and Support Services (N620 million); Capital Market (N600 million), and Public Utilities (450 million).

Meanwhile, NPLs swelled in some other sectors in the period, with Construction leading the charge.

Bad debt in the construction sector hit N81.60 billion in the third quarter, an increase of N9.25 billion in one year.

Other sectors that recorded a rise in NPL include the agricultural sector (N49.96 billion); education (N8.69 billion); government (N1.28 billion), and waste management (N2.24 billion).