Asset Quality: Banks to Raise Impairment Charges on Credit Losses

Asset Quality: Banks to Raise Impairment Charges on Credit Losses

The United Capital Plc, a leading investment banking firm headquartered in Lagos, said it expects non-performing loans (NPL) in the banking sector to increase significantly due to substantial exposures to hardest sector.

The amount of impairment charges on credit losses taken through the income statement would level up due to weak loans repayment, loans forbearance granted to big accounts.

The expected rise in problem loans was also supported by Vetiva Capital Management analysts that estimated modest uptick in NPL ratio for its coverage banks.Asset Quality: Banks to Raise Impairment Charges on Credit Losses

Outbreak of COVID-19 has impacted corporates and government economic performance, and analysts believe that this would impact loans quality.

With the reduce assets quality, lenders are expected to book higher impairment charges on credit losses, analysts explained.

The amount to be booked, as Moody says in a report, will be impacted application of the International Financial Reporting Standards 9- Expected Credit Losses.

In its second half of 2020 outlook report, United Capital stated that it expects loan growth to be muted as lenders are conscious about risk management.

Banking sector loans exposure to Oil and Gas, according to data provided by the investment firm stands at 19.90%.

Analysts assessed impacts of COVID-19 on the oil and gas clients’ accounts as high risk.

The same goes for manufacturing concerns where banks’ exposure settled at 15.30% of the industry’s book.

Other sectors with moderate exposure range between the range of 5% to 7.30% but considers as high risk include trade and general commerce.

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Analysts explained that banks have 7.30% exposure to trade and general commerce.

Though, banking sector to construction and real estate were minimal, at 4.20% and 3.50%, impacts of COVID-19 on both sector is high.

United Capital considers exposure to finance, insurance and capital as well as downstream oil and gas operators moderate.  

“In terms of asset quality, we expect NPLs to increase significantly due to substantial exposure to some the hardest hit sectors, especially oil & gas, manufacturing, and trade & general commerce.

“Also, in the consumer lending space, we expect a significant level of defaults as unemployment levels rise and salary cuts have become the order of the day”, analysts explained.

By implication, impairment losses are also anticipated to surge on the back of guidelines prescribed by IFRS 9, United Capital stated.

The firm explained that the key import of IFRS 9 is the introduction of a forward-looking “expected loss” impairment standard.

This requires banks to provide more timely recognition of expected credit losses (ECL), based on future expectations, in place of the “incurred loss” model.

As such, analysts said they expect banks to take higher impairment losses as a reflection of weaker macroeconomic realities in 2020 as we know it.

Vetiva Capital limited however stated that it expects full impacts of COVID-19 to accurately reflect in the second quarter, and second half of 2020.

“Although, industry’s non-performing loans was around 6% in the financial year 2019, our coverage banks were at 5.6% on the average in the first quarter of 2020”, Vetiva said.

This was slightly above the Central Bank of Nigeria’s 5% benchmark.

The firm explained that the increased risk of default will likely raise the average in near term, analysts explained.

However, Vetiva said due to unique nature of the economic downturn, lenders remain fairly optimistic of a swift V-shaped recovery and deferred some of their income rather than writing them off completely as bad loans.

“We estimate modest uptick in in NPL ratio of our coverage banks, tempered by the increased repayment periods and moratorium granted to maintain assets quality”, Vetiva Capital stated.

Asset Quality: Banks to Raise Impairment Charges on Credit Losses

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