Majority of the deposit money banks which closed their books in the year end recently posted marginal profits just as they recorded staggering amount of nonperforming loans within the same period, thus rendering their modest gains almost inconsequential, reports Bukola Aroloye
For most deposit money banks, especially those who have had their annual general meetings, the year end was indeed eventful in a manner of speaking considering the problems they had to grapple with chief among which is the unprecedented increase in the nonperforming loans over the period.
It is instructive to note that economic headwinds have adversely impacted bank borrowers, resulting in rising NPLs, which has required additional provisioning by banks, thereby reducing the capital adequacy ratio (CAR) of the banks.
Small banks categorised as banks with N500 billion or less in assets, are worse impacted, as their Capital Adequacy Ratio (CAR) stood at 3.14 percent at the end of December 2016, a situation that means they will require to raise equity immediately or risk shutting down their operations.
The decline of the CAR of small and medium banks is however not expected to weigh significantly on the banking industry because large banks, defined as banks with total assets of more than N1trn, hold a significant proportion (88.02%) of total banking industry loans and have capital average CAR in excess of 15 percent.
In order to test the resilience of the banking system to the rising risk levels however, the CBN also stated in the report, that it carried out a stress test covering 23 commercial and merchant banks in the country, to evaluate the resilience of the banks to credit, liquidity, interest rate and contagion risks.
The post-shock stress test results showed that the various categories of banks, except small banks, were resilient, at a 100 per cent increase in NPL as their CAR stood above the 10 percent regulatory threshold.
But none of the groups could sustain the impact of the most severe shock of a 200 per cent increase in NPLs, as their post-shock CARs fell below the 10 per cent minimum prudential requirement.
The impact of the severe shock scenario will result in a decline of CAR to 5.87 for the banking industry, 8.25 for the large banks with N1 trillion assets base, 7.8 for medium banks with assets of N500 billion but less than N1 trillion, and -84.50 for small banks with less than N500 billion assets base.
CBN’s red alert
The Central Bank of Nigeria (CBN) had recently warned that the rising incidence of bad loans has exposed the banking sector to macroeconomic adversity and weakened resilience in the sector. The warning is coming after the Nigeria Deposit Corporation (NDIC), expressed similar concern, revealing that directors were liable for 40 percent of the N1.85 trillion bad loans in banks.
Speaking recently in Abuja, while briefing the press on the decisions of the last Monetary Policy Committee (MPC) meeting, CBN Governor, Mr. Godwin Emefiele said: “On outlook for financial stability, the committee noted that the banking sector was becoming less resilient as a result of the adverse macro-economic environment. Nevertheless, the MPC reiterated its resolve to continue to pursue financial system stability. To this end, the Committee enjoined the management of the bank to work with DMBs to promptly address rising NPLs, declining asset quality, credit concentration and high foreign exchange exposures.”
NPL’s outlook
As economic recession continues to weigh on the banking sector, non-performing loans ratio in the banking industry has crashed further above the CBN’s five per cent threshold.
The NPLs ratio fell to 13.4 per cent in September 2016, up 11.7 per cent recorded in June 2016, according to a Bloomberg report.
The industry-wide NPLs ratio had hit 5.3 per cent in December 2015, exceeding the prudential limit of 5.0 per cent, the CBN Financial Stability Report for the first half of last year revealed.
Specifically, the NPLs in the period under review grew by 158 per cent from N649.63bn at end-December 2015, to N1.679tn at end-June 2016, the CBN report showed.
Dozier of banks’ NPL
The Group Managing Director, Access Bank Plc, Mr. Herbert Wigwe predicted that the level of troubled loans would continue to climb before an economic recovery in the second half of the year would bring relief to the banks.
“Across the entire industry, you’ll see an uptick in non-performing loan ratios,” Bloomberg quoted Wigwe as saying in a report. “We are better than most,” the Access Bank GMD added.
Access Bank, the country’s fourth-largest bank by assets, expects that its NPLs will climb to “slightly below” three per cent of total loans by the end of this year, compared with 2.1 per cent for the nine months through September last year.
The picture is not as rosy for the rest of the industry as lower crude prices and foreign-currency shortages cause the economy to contract.
Wigwe said the lender was targeting companies that sourced their raw materials locally for loans to reduce the risk of unpaid debt.
First Bank of Nigeria Limited, the country’s biggest lender by assets, stood out among the largest banks with an NPL ratio of 22.8 per cent at the end of September last year.
Zenith Bank Plc, United Bank for Africa Plc and Guaranty Trust Bank Plc had the NPL ratios ranging from 2.2 per cent to 4.1 per cent.
Capital levels also decreased. The sector’s capital adequacy ratio fell to 14.7 per cent in June from 16.1 per cent in December 2015.
For big banks, which the CBN classified as having more than N1tn of assets, the ratio fell to 15.65 per cent, still above the requirement of 15 per cent.
The CBN left its benchmark interest rate unchanged at a record 14 per cent in November as it seeks to contain inflation that rose to the highest level in more than a decade, with President Muhammadu Buhari planning to boost spending this year by 20 per cent to revive growth.
Also, the Managing Director, FBN Holdings, Mr. U.K Eke, described 2016 as a year characterised by significant uncertainty in the operating environment.
“We expect an improved economic environment through 2017 and are confident that the foundations we have put in place will drive improved financial performance and consequently enhance shareholders’ returns,” he said.
Also, the Chief Executive Officer, Diamond Bank, Mr. Uzoma Dozie, said in the months ahead, the bank would continue to deploy new technologies and digital applications to drive financial inclusion and convenient banking amidst a decline in the pace of economic activities and weak economic fundamentals.
A check revealed that Union Bank of Nigeria in 2016 reported 6.91 per cent NPL ratio as against 6.67 per cent in 2015 while Unity Bank Plc’s NPL ratio was the highest in the banking sector last year.
Unity Bank had reported 97 per cent bad loans in 2016 as against 77 per cent in 2015 which translates to N369 billion of total NPL of the bank from N241 billion reported in 2015.
Other commercial banks include Sterling Bank Plc with 9.9 per cent NPL reported in 2016 as against 4.8 per cent in 2015 and Stanbic IBTC Holdings Plc that reported 6.6 per cent NPL ratio in 2016 from 8.5 per cent in 2015.
Shareholders react
Expectedly, shareholders have called on the apex bank to blacklist bad debtors and remove directors of Union Bank and other banks with non-performing loans above the 5 per cent threshold ratio stipulated by the apex bank. This is to help in preventing further abuse of loan approvals and check excesses of businessmen colluding with directors of banks against the interest of depositors and shareholders.
Speaking on the challenges of nonperforming loans on shareholders, Chairman, Renaissance Shareholders Association, Olufemi Timothy said: “When you are talking of this issue, you have to talk about the regulator. They have more power to do things than the ordinary minority shareholders. Minority shareholders are powerless, we may have voice but the management and major shareholders will have their ways.
“That is why the power of shareholders are very limited. The CBN is aware of this development and they have the records because they are the inspectors. The problems shareholders are having today are the regulators. If they are doing their job, the minority shareholders will just be like the whistle blower and when you blow whistle but nobody is listening, there is nothing we can do.
“We have complained but you know with the Nigerian system, we don’t have the power to remove Directors. The power we have is just on paper.”
Echoing similar sentiments, President, Progressive Shareholders Association of Nigeria, Boniface Okezie said, “Shareholders of the above banks cannot do anything because they were not there when those loans were given.
“In the first place banks are meant to give loans to customers but they don’t service these loans because they see it as national cake. For you to grow the economy, you need to give loans because without loans, you cannot grow your business.
“If you don’t pay these loans, banks may not be in business. Don’t forget that these loans are from depositors and shareholders’ fund. At the end of the day, there is nothing to appropriate to shareholders in form of dividend.
“For instance, if you borrow from Unity Bank and have not paid, there is no way you can go to UBA to get loan again. CBN should make it mandatory that a customer that is indebted to one bank cannot go to another bank to access facilities.”
Sir Sunny Nwosu also advice that the company should go out aggressively to recover the loans for better dividends payment in the future, adding that this was the best time to buy into the company in order to be part of its success story.
Experts’ view
Ayodeji Ebo, managing director, Afrinvest Securities Limited suggested that a closer monitoring of the credit and approval processes of the Tier-2 banks by the CBN may be required to curtail the increasing proportion of NPLs in the banking industry.
“It is not surprising to see this significant surge in NPLs in 2016 on the back of the cocktail of challenges in the Nigerian economy, which affected credit advanced by the banks. Higher NPLs recorded by Tier-2 banks may suggest a weaker risk management framework and perhaps credit disbursement process. The Tier-1 banks have been able to restructure a significant chunk of their dollar denominated loans, to further reduce their exposure to foreign exchange risk”, Ebo said
Meanwhile Vivian Shobo Managing Director, Agusto& Co said that the macro affects the micro and banking systems usually will reflect what is happening in the macroeconomic environment. The macroeconomic environment has affected the banking industry on two fronts – Asset quality and Earnings. Asset quality has deteriorated with delinquent oil and gas, power and general commerce loans.
Agusto & Co is projecting higher double digit non-performing loans in the banking system – 12.5% in 2017 from 7.5% 2016. Loan losses will impair earning by up to 30%. We believe that capital will be adequate for most of the banks. However, some banks will need to raise capital, to buffer the capital eroded from loan losses. Inflation has also affected the operating cost of financial institutions. As a result we are expecting higher cost to income ratios. There will be liquidity constraints for some players due to the implementation of the TSA, while other players with large retail networks will not be as affected as those with smaller branch networks.
According to Johnson Chukwu, Managing Director/CEO Cowry Asset Management said: “The level of bad loans in the banking system is increasing principally due to the weak economic conditions which climaxed in a contraction of the economy by 1.58% in 2016.”
He further noted that the challenges of an economic contraction, which includes weak consumer demand is worsened by the high interest rates in the banking industry. With very low sales which most businesses are suffering, it becomes difficult for businesses to cover the operating costs and still meet their interest payment obligations. In effect, most businesses are not generating enough cash flow to meet their liabilities due to reduced sales occasioned by economic recession, increased operating costs attributable to high inflation rates and very high and even increasing interest rate.