Banks to take sharp earnings haircuts as economy battles virus

Not as a result of lack of competitive strengths but banks are expected to take sizeable haircuts in earnings performance in 2020 earlier guided.

Some equity analysts predicted that banking industry’s performance would drop due to impact of coronavirus, sliding prices of oil.

After oil price resurgence, Banks had returned to extend some high ticket credit facilities to oil and gas clients.

A reverse in this direction started when the Central Bank of Nigeria initiate new loans as proportion of deposits target in the second half of 2019.

As a result, equity analysts as well as banks have indicated the need for earnings adjustment to 2020 guidance that was previously set.

Recognising that the coronavirus pandemic solution is not immediately available, both banks and analysts have started cutting key performance metrics for the year.

This looks like the first case in point where banks and analysts have found mutual ground or reasons to adjust forecasts in decades.

The adjustments which take negative side projected that lenders profitability would slipped down at the range of 10% to 30% while some smaller banks may reel out negative results.

Analysts expressed that earnings estimates miss would feature more this year, and it might take long time for normal activities to return to normal.

MarketForces gathered that banks would have to deal with multiple issues in 2020.

Research analysts at LSintelligence said banks have done internal stress test due to the recent adjustment made to Naira exchange rate at Investors and Exporters window.

Also, currency traders and analysts remain bearish on FX position as they are expecting naira to find its true value.

Big banks are undergoing serious balance sheet stress test due to the expectation for potential devaluation of the currency.

Apart from issues with FX, operators are also grappling with oil and gas assets in the face of declining in global prices of oil.

Also, the developments combine is expected to reduce economic prosperity in 2020 as government revenues sources are under threat at the moment.

Atlantic Council, a non-partisan organisation in the United States estimates revenues loss of $15.4 billion for Nigeria due to coronavirus pandemic and declining prices of oil.

Dividend payment would be affected as the need to plough back retain earnings would help banks to strengthen capital adequacy ratio.

The decision that would mostly supported by the industry target relating to proportion of total deposits that must be extended as loans in the real sector.

At their separate conference call with analysts, some Banks indicate that due to development in the economy, their performance may fall short of their initial guidance.

Booming with optimistic that economy would spike in 2020, Tier-I capital banks had set ambitious targets.

Most of these targets, as they explained, were as a result of the Central Bank of Nigeria decision to re-channel credits to support the real sector.

Unfortunately, after the apex bank tough regulation, the global prices of oil began to retreat due to inability of the OPEC+ to balance demand and supply equation among its members.

As if the declining oil price is not, coronavirus pandemic added thus exacerbate the situation causing analysts to worry about default rate.

Speaking at earnings call with analysts recently, Nnamdi Okonkwo the Managing Director and Chief Executive Officer at Fidelity Bank Plc adjusted its projected profit metrics down by 15%.

Trend like this would affect dividend payment among bulge balance sheet banks with combine total assets at N30 trillion.

Analysts said there is probability that Tier-2 capital banks earnings would be flat in 2020.

Given the fact that there is already pressure in the sector due to increase in cash reserve ratio to 27.5%.

In addition, loan to deposits ratio is pegged at 65% which gives operators tiny opportunity in other alternative investment windows to support their bottom line.

Unfortunately, more of the industry’s risk assets are now in the real sector of the economy.

Meanwhile, there have been expectations that Nigeria would automatically slip into recession after the pandemic.

OPEC+ oil prices bucket dropped to less than $19 per barrel on Thursday while Nigeria’s produce a barrel at around $17.

This leaves the economy with marginal spreads not enough to finance government activities, the same time when foreign investment inflow hits bottom.

Experts at LSintelligence Associates said the current situation has exposed the wrong economic structure that the nation has adopted and refuse to reposition.

“There have been two major key players in the economy. First, government has been major spenders followed closely by the Banks.

“Banks have some N40 to N50 trillion in assets and their safety is important to the future of the economy.

“It is unlike that government would be able to spend in 2020. That means performance of the economy is largely in the hands of these banks”, the firm stated in an email.

However, experts recognise that the pressure on the economy would have been aggravated if the CBN initial initiative to push credit into the real sector was a day late.

In addition, the government decision to stop importation has been largely position, plus initial ban on the 41-items by the apex bank to access foreign exchange.

Analysts said top banks like GTB, Zenith, Access, UBA and FBN has high exposure to oil and gas industry.

Due to the high loans concentration in this segment, and the fact that the industry is under facing massive prices reduction, operators’ loans may not perform.

Average non-performing loans in the banking sector may shoot up as high as 250 basis points, analysts told MarketForces.

They are of the views that NPL will rise  due to pressure from oil and gas clients’ accounts.

It is also observed that the apex bank stretch on banks in the second half of 2019 have had some impact where banks overplayed their activities.

Though, many banks maintained at their earnings calls with analysts the need not to be reckless with credit creations.

Banks to take sharp earnings haircuts as economy battles virus