Nigerian Banks Q3 Profits to Reflect Impacts of LDR Policy, IFRS 9
Banks earnings in the third quarter will be tested based on susceptibility to apex bank 65% loan to deposits target and implementation expected credit losses (ECL) as per International Financial Reporting Standard 9.
With low interest yield environment, average earnings from loans assets in the banking sectors witnessed a decline in the first half.
As a result of the new order, banks have been re-pricing deposits to align the two sides as a way to maximise earnings.
For Banks, the biggest effect of IFRS 9 is the increase in loan loss provisions from the new expected loss impairment model, as compared to IAS 39’s incurred loss model.
In the first half, the best in class lenders reported a higher than usual credit charge on impairment credit losses, now analysts have predicted this could be sustained down the year.
What this means for lenders is lower earnings as provisioning reduced profitability, however the higher the size, the heavier the impacts.
But with the CBN allowing some forbearance to restructure loans, it is not clear if Nigerian banks would total implement IFRS, as it actually requires some judgement.
Analysts believe that in line with weak macroeconomic condition, Nigerian banks are expected to book a relatively high impairment charge on credit losses down the year as non-interest related earnings reshape revenue pattern, analysts have hinted.
Amidst expectation of the third quarter (Q3) earning results, a slew of detailed they are expecting a further rise in impairment charges on credit losses.
This was hinged on the weak macroeconomic condition as small and medium scale companies are face with rising cost and demand pressure.
Many companies are yet to stabilise their revenues sources, some analysts informed MarketForces Africa.
Cardinalstone Partners said the negative impact of the pandemic was noticeably felt in banks’ Q2 performance with asset yields, net fee income and impairment charges worst hit.
With companies earnings coming below expectation due to the impacts of Covid-19 economic displacement, meeting banks obligations may be difficult still.
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.
Lenders rode on the apex bank forbearance to restructure their loan assets in the first half as way to support the banking sector.
Having noted that some economic agents with dealing with banks were impacted with lockdown, 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 chunk of non-performing loan.
Trailing the Oil and Gas sector, banks loans to general commerce as well as retail loans faced with 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 movement of loans from one stage to another, thus reduced the impacts of negative economic condition.
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 at Vetiva Capital that sought to ascertain the net effect of the economic slump on the performance of banks within its coverage 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, analysts stated that many businesses were unable to carry out activities to generate income.
This meant an increase in default risk on loans given out by banks amid the 65% loan to deposit regulation set by the CBN, Vetiva Capital stated.
Total loans expanded by 5.7% quarter on quarter in the fourth quarter of 2019 and 5.7% quarter on quarter again in 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.
Failing to meet the CBN LDR target has resulted to serial debits with trillions of naira completely sterilise.
Banks have been complaining about the CBN non-refund policy with average industry’s effective cash reserve ratio rising consistently.
In a report, Cardinalstone said between December 2019 and June 2020, its coverage banks’ total restricted deposits with the CBN rose 90.5% to N8.5 trillion.
The investment firm said STANBIC and FCMB the most impacted at 3.3x and 2.0x increases, respectively.
In absolute terms, Cardinalstone stated that FBNH, UBA and ZENITHBANK now have over N1.5 trillion in restricted cash reserves, respectively, with the CBN.
Meanwhile, 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 quarter rise as lender booked ₦4.4 billion in the second quarter of financial year 2020.
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 industry loan book (about ₦7.5 trillion).
This mean 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 double 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 guide to how companies stand.
Many banks are looking at reducing operating expenses as they rely on few branches to deliver services to customers.
With low interest rate environment, banks are shifting focus to non-interest earnings sources and personal lending services using digital platforms.
Nigerian Banks Q3 Profits to Reflect Impacts of LDR Policy, IFRS 9