Analysts Project Moderate Rise in Banks Impairment Charge in Q3
Analysts have predicted a further rise in impairment charges on credit losses booked by Nigerian banks to rise further in the third quarter.
After a steep record of provisioning booked by lenders in the first half, the industry estimate indicated that a further increase would be witness this earnings season due to weak macroeconomic conditions.
Due to covid-19 induced lockdown in the first six months of 2020, many companies and individuals with exposure to banks were unable to meet their short and long term obligation.
Noting the development, the apex bank granted lender’s forbearance to restructure loans.
In their separate financial statements for the period, exposure to oil and gas sector were significant and accounted for a chunk of non-performing loan.
Trailing the Oil and Gas sector, banks loans to general commerce as well as retail loans faced various challenges.
Banking sector risk assets were largely threatened due to pressure from obligors’ side, and lower than estimated global price of oil.
As a result, based on the financial statements submitted to the Nigerian Stock Exchange, lenders booked unusually high provisioning.
But CBN forbearance halted the movement of loans from one stage to another, thus reduced the impacts of negative economic conditions.
In its note, analysts at Vetiva Capital sought to ascertain the net effect of the economic slump on the performance of banks within its coverage.
It would be recalled that the Nigerian economy contracted 6.1% year on year in the second quarter of 2020, mainly caused by the lockdown in major cities in the country.
Analysts explained that while the economic performance plunged, second quarter loan book growth belies drop in interest income in the banking sector.
As a result of the shutdown, many businesses were unable to carry out activities to generate income.
Vetiva said this meant an increase in default risk on loans given out by banks amid the 65% loan to deposit regulation set by the CBN.
This saw total loans expanded by 5.7% quarter on quarter in the fourth quarter of 2019 and 5.7% quarter on quarter again in the first quarter of 2020 to ₦18.56 trillion.
Interestingly, analysts said gross loans continued to grow in the second quarter, most likely as a result of the measures put in place by banks to expand their loan books in the wake of the CBN’s policy.
Industry loan book grew by 1.8% in the second quarter to ₦18.90 trillion, bringing total loan book growth to +7.6% year to date.
“Among our coverage banks, Loan loss provisions went up 115% quarter on quarter, with two banks bearing the brunt of the effect in nominal terms”, Vetiva stated.
The firm mentioned Zenith and FirstBank of Nigeria holding as both reported provisions of ₦20 billion in Q2 alone”, Vetiva stated.
In its equity note, Vetiva Capital noted that even banks with historically low provisions reported extraordinary surges quarter on quarter.
Guaranty Trust Bank Plc provision spiked +353% quarter on quarter as lender booked ₦5.5 billion in the second quarter alone.
Also, STANBIC reported a 126% quarter on the quarter rise as lenders booked ₦4.4 billion in the second quarter of the financial year 2020.
United Bank for Africa, Access Bank among others were affected by increased impairment charges in the period.
However, Vetiva said this surge in provisions was actually not the worst-case scenario, thanks to the approval of the CBN for the restructuring of about 40% of the industry loan book (about ₦7.5 trillion).
This means a large proportion of Stage 2 (Doubtful) loans were given new repayment tenures or different interest charges to ensure continued payment.
“Without this, industry provisioning would have likely been almost doubled the current figure”, Vetiva explained.
Meanwhile, some Broadstreet analysts told MarketForces that many banks will carry high provisioning down the year as corporates pass through economic healing processes.
They noted that some companies that accessed loans are still grappling with weak macroeconomic conditions.
Analysts made reference to the Central Bank of Nigeria’s Purchasing Manager Index as a guide to how companies stand.
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Analysts Project Moderate Rise in Banks Impairment Charge in Q3
