Nigeria’s Five Largest Banks Loan-Loss Provisions Jump 66%
Godwin Emefiele, CBN Governor

Nigeria’s Five Largest Banks Loan-Loss Provisions Jump 66%

Following the pandemic-induced economic stress in 2020, the Nigeria’s largest banks – Access, Zenith, First Bank, United Bank for Africa and GTBank – increased their loan-loss provisions by 66% in financial year 2020 to cover 1.5% of their combine gross loans, Moody said in a new report.

The credit rating firm said the five banks increased provisions for problem loans 66% to cover 1.5% of gross loans booked in the year compare to 1.0% coverage provided in 2019.

Some banks clients had faced tough time meeting their obligations to the lenders amidst the global economic lockdown in the first half of 2020.

This development necessitated the Nigerian Central Bank (CBN) to grant forbearance to financial institutions, noting the impact the lockdown had on the economy and businesses.

Many Nigerian bank took the opportunity to restructure their loans book, especially the Tier-1 Banks due to significant exposures to Oil and Gas segment.

Concentration of credit in oil and gas space raised credit default rise as oil price went down significantly to the point that crude hit contango condition.

Some analysts said many banks will have a further impairment raise when moratorium granted expires as expected loss on credit losses will surface in a big way on big banks income statement.

Moody said, “While the higher provisions will enhance the banks’ loss-absorption capacity, a credit positive, the banks will still need to increase provisions that remain below their recent 10-year averages as a ratio of gross loans, if, as we expect, asset quality deteriorates”,

It added that when oil prices collapsed in 2015-16 and triggered a recession, the average cost of risk -provisions as a ratio of gross loans- for the five banks was 3.4%.

“We expect gross domestic products (GDP) growth to recover to 2.1% this year but to remain anaemic at 3.1% next year, straining banks’ asset quality”, the firm said.

In the financial year 2020, the five banks booked N192.8 billion loan-loss provisions compared with N116.4 billion in 2019.

The increase, according to Moody, reflects the banks’ expectations that credit losses will rise because of pandemic-related economic uncertainty.

“We estimate that combined provisions will increase by 25% if they rise to their recent 10-year averages, reducing the banks’ profits by about 6%”.

However, it noted Tier-1 Banks management expect improvements in credit costs this year, saying the lenders’ average cost of risk was 50 basis points higher than in 2019, but remains below the 2010-19 1.9% average.

Moody said First Bank’s cost of risk is the highest at 2.4%, although absolute provisions declined slightly in 2020, continuing an improving trend.

In contrast, Guaranty’s provisions increased 298% – the most among the five banks- and its cost of risk increased to 1.1%, on par with its 10-year average.

Also, Access Bank provisions increased 201% to 1.8% of gross loans, and the ratio is now above its 10-year average of 1.3%. UBA’s provisions rose by 37% and Zenith’s by 65%, and their credit costs are below their averages.

It said only Access Bank’s cost of risk in 2020 was above its 10-year average Loan-loss provisions/gross loans.

Meanwhile, Moody explained that the banks’ combined 2020 profit increased by an average 10%, though the return on assets (ROA) declined to 2.0% from 2.3% a year earlier.

Guaranty’s return on asset was the highest at 4.1%, down from 5.2% in 2019, while First Bank’s recorded 1.0% return on asset, which was the lowest among these banks.

However, Moody said higher pre-provision income for Guaranty at 5.1% of total assets, and at Zenith, at 3.5%, will protect their profits if the cost of risk rises.

“We believe Nigerian banks’ asset quality will diminish over the next 12-18 months, reflecting the lagged impact of the pandemic on borrowers”, it added.

Explaining further, Moody said these banks have large exposures to the cyclical oil and gas sector that average 30% of total loans, and to manufacturing, trade and commerce, sectors that are vulnerable to a resurgence of the pandemic.

“There is a high risk that banks’ Stage 3 loans will increase this year as some Stage 2 loans migrate to Stage 3. In 2020, Stage 3 loans rose by just 2% because pandemic-driven restructurings suppressed the formation of nonperforming loans”, it said.

But the ratings firm noted that the ratio of combined Stage 3 loans to gross loans for the largest five banks improved to 6.0% at the end of 2020, from 6.8% a year earlier.

It said the volume of Stage 2 loans, which capture some of the restructured loans, more than doubled at Zenith and increased 13% at Guaranty, although volume contracted at Access and First Bank as the two banks work out legacy loan portfolios.

Moody said the five largest banks have maintained good capital adequacy ratios, said the average dividend payout ratio for the banks was 33% in 2020 and the average reported total capital adequacy ratio was 21%.

In addition, banks’ absorption buffers benefit from their large regulatory risk reserves when their International Financial Reporting Standards impairment costs are lower than the regulator’s impairment cost requirement.

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Nigeria’s Five Largest Banks Loan-Loss Provisions Jump 66%