Things appear to be going from bad to worse for commercial banks in Nigeria. As investors grapple with the spate of ongoing impairments in the oil and gas sector. The latest court order reversing the increase in electricity tariffs is set to present a new source of worry for commercial banks.
Analysts at Afrinvest had in a 2014 research opined that the Nigerian banking industry was exposed to the power sector to the tune of about $1.3bn for Discos and $1.7bn for Gencos following the sale of assets in 2013. This amount is expected to have increased over the years via a combination of unpaid interests and loan refinancing.
Nairametrics believes that Nigerian Banks who lent to the power sector face the risk of losing part of the $3 billion extended to the power sector for the purchase of Government assets in November 2013. With the tariff hike likely reversed, investors will be looking closely at banks Non Performing Loans (NPLs) with the expectation that it could spike in the next two to three-quarters if the tariff reduction hurt revenues and cash flow from the power sector.
A combination of a troubled power, oil and gas and manufacturing sectors of the economy is now looking like a recipe for a repeat of the financial crisis of 2009 where several commercial banks in Nigeria were Nationalized. Unfortunately, if this were to occur again, Asset Management Corporation Of Nigeria (AMCON), the bank created to buy bad loans, would probably turn a blind eye considering that it faces its own share of financial crisis. AMCON we understand is focussed on recovering most of the bad loans it bought over from Nigerian banks in 2009.
A receding revenue on the back of this court decision means a significant loss of income to power companies hence undermining their abilities to pay interest on loans borrowed to finance investment outlays.
For banks, they will be in a morass or imbroglio of huge write-offs and rising impairment on assets as defaults will be heightened. The consequences are lower profit in the third and fourth quarter potentially affecting the share prices of most banks. Oil companies like Seplat and Oando who rely on Gas sale as incremental revenues could also take a revenue hit due to this decision.
Banks exposure to Power Sector
A look at the 2015 Annual report of some commercial banks in Nigeria showed the following as banks with exposure to the power sector
- UBA – N104.5 billion
- Fidelity Bank – N68.4 billion
- Diamond Bank – N65.9 billion
- Zenith bank – N55.7 billion
- FCMB – N27.2 billion
- Access Bank – N15.9 billion
- Sterling Bank – N14.9 billion
- *FBNH – First Bank does not have a separate category for Power in its annual report. However it notes that its exposure to oil and gas sector is about N590 billion which includes power.
These loans were mostly extended in foreign currency and could significantly increase with the floating of the Naira thus exacerbating the risk.
Retail investors will be watching events closely as the impact of this court decision may posse significant risk to the value of the shares in these banks. If these loans go bad then there is risk that the loans may crystallize due to non-payment of loans.
