The Central Bank issued a press release on Thursday strongly debunking any thought that any Nigerian Bank may be distressed. This came after website Sahara Reporters published an article suggesting that United Bank for Africa (UBA), First Bank, Diamond Bank, Sterling Bank, Skye Bank, and Heritage Bank, Wema Bank, Unity Bank and Fidelity Bank are in some sort of distress.
CBN reaction was well timed considering the risk unconfirmed rumours such as what was in the media could portend for the financial services sector. But as they say there is no smoke without fire which may mean that the rumour may also have some element truth about it.
Bank Impairments (N’millions)
Source: Nairametrics Research
2015 9 Months
2014 9 Months
Are Banks really sick?
Third quarter results by most commercial banks showed an increase in provisions for loan impairments with the top 9 banks surveyed recording a 107%% increase. This increase compares to a 32% increase for the same banks for the period 2014/2013. Loan impairments are provisions banks are taking in advance of a potential loss in loans given to borrowers. Impairments have been on a rise this year mostly due to the drop in oil prices which has negatively impacted on government revenues. This impact has also affected revenues of oil and gas businesses which make up a huge chunk of bank loans. The ripple effect is also being felt across other sectors of the economy considering the reliance on oil as an economic driver.
The CBN still reports bank’s percentage of non performing loans to total loans are still within acceptable limits of 10% in general. However, it will be foolhardy to ignore the rise in loan impairments this year and how dangerously close some banks are to crossing the dreaded 10% line. Some analysts already believe about three banks could be close to the 10% mark by year end. Typically most banks wait till the last quarter of the year to fully assess their loan provisioning thus increasing their loan impairments. Cost to risk ratio, which is the ratio of loans impaired to total loans and advances is estimated to rise by the end of the year, further impacting on bank profitability.
The Central Bank is probably right to announce that banks are currently not distressed. For banks to be distressed will mean a combination of capital adequacy ratio, cost of risk, non performing loans to total loans all falling behind the required levels. Whilst this is currently not the case, there is not denying that banks are moving closer towards breaching the lines that away from it. The combination of hawkish CBN policies, dwindling economy and the fall in oil prices have all had negative consequences.
Several policy guidelines have been issued this year in brisk response to the economic situation in the country. From a hawkish policy earlier in the year that brought about tightening in the banking sector we have now switched to dovish policies that is primed to flood the economy with cheap lending. The hawkish policies has reduced the amount banks could lend in the better part of this year further impacting on their profitability. The dovish policies been introduced on the other hand could also expose banks to further risk as they are expected to lend to the riskiest sectors of the economy.
The Central Bank has also introduced capital controls in the forex market that has negatively impacted on the financial sector and the larger economy. The effects of these policies are bound to affect the businesses and their ability to service their obligations. There have been several reports about companies not having access to the forex market to purchase dollars which they need to service their dollar denominated loans. With the threat of more loans going bad due to these policies, the pressure on banks will continue to be a major concern as we approach the last few weeks of the year.
Though the CBN has come out to deny that there is any distress in the economy, it does acknowledge that the banking sector is under some pressure. Last week it issued a circular increase the percentage provision of performing loans from 1% to 2%. The 100% increase it claimed was “an attempt to ensure that adequate buffers against unexpected loan losses are built up.” It also admitted in the circular that the ” adverse macro-economic environment has been a source of concern in the financial sector.”
The CBN’s decision to increase provisions from 1% to 2% may appear contradictory to its latest Monetary Policy Communique where it confirmed that the banking system was sound and resilient.
The Committee noted with satisfaction the stability, soundness and resilience of the banking system even against adverse global financial conditions.
The CBN is responsible for ensuring financial system stability and will not be expected to sit back and allow the media run away with stories that suggest that our banks are sick or under stress. Whilst “distress” may not be the appropriate word, it will be hard to deny that our banks are under immense pressure, some of which are a direct result of the Central Bank’s policies.