Deposit Money Banks in Nigeria could report lower profits for the first quarter of 2018 ended March 31st, due to IFRS 9 rules which requires them to fully disclose their loan portfolio, among other assets.
As earlier reported by Nairametrics, – the International Financial Reporting Standards 9 (IFRS 9) – was slated to come into effect this January. What this means, therefore, is that deposit banks must abide by its provisions while reporting their financial statements for the first quarter; forthwith.
Aside from the fact that the International Financial Reporting Standards 9 requires commercial banks to fully disclose their assets, it also mandates them to make provisions (in advance) for non-performing loans. Bear in mind that quite a number of deposit banks in Nigeria have high non-performing loans.
Meanwhile, this new regime also marked a complete departure from the old, whereby provisions were made for incurred bad loans to expected bad loans.
Why the IFRS standards could cause lower profits
The new reporting standard could lead to lower profits for deposit banks because banks now have to pay for any bad loans directly from their profit. We saw this coming, having written that the profitability of banks may be affected as banks would have to make provisions for both impaired loans and loans they expect to go bad. Recall that Nigeria has just emerged from a bad economic recession, which was caused mostly by declining oil prices, which in turn caused banks to take provisions on loans granted the oil and gas sector.
According to Jamiu Olakisan, a Partner at Ernest and Young:
It is in the 2018 financial reports that we will see the full effect of this (new rule). We should expect volatility in the amount of impairment (provision for bad loans) figures that will be reported by banks, simply because it is not just based on historical or current information, but it is based on forecast of the future that nobody knows with certainty.
Who will be affected by this?
Retail shareholders stand the risk of being affected in the event that deposit banks report lower profits as a result of the new reporting standard. Recall that the CBN had earlier issued a circular updating its rules regarding the payment of dividends. One of the highlights of the circular is that any bank or discount houses that have a high composite risk rating of high or Non-Performing Loan (NPL) ratio of above 10% shall not be allowed to pay dividends.
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