A stress test that was recently conducted on Nigerian banks by SBG Securities has revealed that only Guaranty Trust Bank and Zenith Bank show profitability at a cost of risk of 10%. The report, which was seen by Nairametrics, also revealed that First Bank of Nigeria Limited and United Bank for Africa show profitability at a cost of risk of 5%.
However, at a cost of risk of 15%, all Nigerian banks post losses ranging from negative earnings per share of N0.74 for Guaranty Trust Bank, to N7.4 for Access Bank. It should also be noted that when compared to its large balance sheet, Access Bank’s lower efficiency and profitability increased the risk in the stress test results.
Potential high loan losses: All the banks that were reviewed in the stress test are said to show potential joint loan losses of N670 billion, N1.34 trillion, and N2.01 trillion, with a cost of risk of 5%, 10%, and 15%, respectively. Access Bank and Zenith bank show the highest potential loan losses, while FCMB and Fidelity Bank show the lowest.
The report, however, explained that a straight-line approach had been adopted during the stress test, meaning that the potential loan losses will primarily be the function of the banks’ balance sheet sizes. In other words, the level of collateral coverage each of the banks have at their disposal, should be able to limit their overall impairment level.
GTB’s and Zenith’s robust capital levels: The SBG Securities’ stress test also projected that the Capital Adequacy Ratio (CAR) of both Guaranty Trust Bank and Zenith Bank will remain strong, even in the worst-case scenario whereby there are declines of 19% and 17%, respectively.
On the valuation of the Nigerian banks, the report described them as attractive, although beclouded by uncertainty due to the unforeseen level of medium to longer-term impairments. The report said:
“While the valuations of the banks look attractive at this point, the level of medium- to longer-term impairments on capital remains uncertain at this time. Even with the CBN’s forbearance, which allows banks to restructure loans in the oil and gas, manufacturing, agriculture and a few other sectors, the level of weakness of consumer earnings capacity will determine the interest income outlook and potential recovery. Hence, NPL ratio and loan loss impairments may not increase as shown in our stress test, but interest income may collapse considerably as customers request moratoriums to ease earnings pressure from a slowdown in economic activity as a result of COVID-19.”
Meanwhile, there are risks: SBG Securities said that the stress test results indicate the probability of increased asset quality deterioration, particularly in the oil and gas sector. This is due to the current volatility in oil global prices. In the same vein, the report pointed towards elevated risks in other sectors such as aviation, tourism, as well as hotel/hospitality.
Disruptions in the value chain have also been projected to negatively affect the general commerce and manufacturing sectors. These are due to the Coronavirus pandemic and the subsequent shutdowns of major Nigerian cities, as part of ongoing effort to contain the pandemic.
Other risks that were highlighted in the report include:
- There is NIR risk from LC commissions and other trade-related income.
- Lower NII from restructured loans – with adjustments such as moratoriums and lower interest rates depressing interest income.
- There is a risk to incremental credit growth due to the slowdown in the economy.
- However, there is upside potential to e-banking revenues and electronic payments for banks in the near to medium term.
SBG’ top picks: At the end of the stress analysis, SBG Securities concluded that the resilience, robust balance sheets, and high efficiency of Guaranty Trust Bank and Zenith Bank Plc have placed them in a good position to be able to withstand the risks and negative economic impacts posed by the Covid-19 pandemic. To this end, the two tier-1 banks emerged top picks.
Notes: Stress tests are conducted in order to determine whether commercial banks are taking the necessary steps towards prevent failure in the event of an economic breakdown. These tests are designed with the aim of protecting the consumers who place their funds in the trust of banks. It is also intended to prevent a financial crisis from escalating.
You may download the full report here.