The Central Bank of Nigeria has issued a circular to Nigerian banks instructing them to increase the provisions on performing loans to 2% up from 1%, Reuters reports. This is in reaction to the increase in loan impairments reported by most commercial banks this year.
A review of the 2015 9 Months results from the top 5 Nigerian banks reveals they have taken in a combined N81.8 billion in impairment charge for the first nine months of the year. This figure is already up 142% from a year earlier. FBNH tops the list with about N46.6 billion representing a 249% rise in impairment charge year on year. UBA and Zenith also saw impairments rise 103% and 99% respectively. Other Tier 2 banks have reported impairment charges. Ecobank for example took a charge of N34.6 billion (2014: N23.4b) whilst Diamond Bank took a charge of N19.4 billion (2014: N14.6billion and Skye Bank N6.4 billion (2014: N7.5billion).
The implication of increasing the provisions from 1% to 2% will have far-reaching implications for shareholders and potential investors. For example, dividend payments will be adversely affected as bank profits are bound to decline. Valuation of most banking stocks are also likely to be impacted as lower profits often lead to lower valuations. The CBN may also be forced to increase how much banks contribute to AMCON’s sinking fund from the current 0.5% of total assets. It was initially 0.3% and increased to 0.5% of bank’s total assets. The sinking fund was basically a model that ensures banks collectively contribute to repay AMCON bonds which was sold to in exchange for Toxic assets. The fund is kept by the CBN.
Despite the threats of bad loans banks have continued to post higher profits compared to the same period in 2014. Analysts are however not impressed as they do not see how banks can be declaring such profits when businesses in the consumer goods, oil and gas and manufacturing sectors have been declaring profit declines. The nation’s GDP has also been on the decline and is expected to further weaken when the Bureau of Statistics releases its third quarter GDP report sometime this week. The CBN may have also recognised this contradiction and rather than wait for commercial banks to report the losses later (or after taking money out in the form of dividends) they have now instructed banks to increase provisions by 100 basis point. The increase inadvertently allows banks to recognise risk earlier than it would have had it remained at 1%.