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New stress test reveals which banks are most prepared to withstand Covid-19

This article reviews the strength of Nigerian banks by checking for asset quality deterioration through reviewing their recent audited financial results.

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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.

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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.

READ MORE: Banks’ assets under strain after naira depreciation

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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.”

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READ MORE: Nigerian banks face gloomy future over low oil prices, coronavirus

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.

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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.

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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.

(READ ALSO: Nigerian banks broadly positive after Naira devaluation)

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.

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Olumide Adesina a French-born Nigerian, is an Investment Professional at Nairametrics Financial Advocates, owners of Nairametrics.com. Olumide Adesina is a certified Investment trader, with more than 14 years of working experience. His work experience covers trading commodity derivatives and analysis of global equities, currencies, commodities, cryptocurrencies, and Fixed Income instruments. A member of the Chartered Financial Analyst Society. You can follow Olumide on twitter @tokunboadesina and email via olumide.adesina@nairametrics.com.

1 Comment

1 Comment

  1. John Ogunwole

    April 9, 2020 at 12:08 am

    Hello Olumide,

    I appreciate your analysis on the stress test, thank you.

    On another note, I see FBNH seem to have returned to profitability, especially with the recent dividend devlarayion. What is your organizations’ opinion on when FBNH will fully be done with provisioning and other impairments?

    Thank you
    John Ogunwole

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Economy & Politics

Output cut: Nigeria leads in OPEC non-compliance with 50 unsold cargoes of crude

Nigeria and Iraq were reported not to have kept to their commitment to the huge production cut deal that had promised to reduce output by 9.7 million barrels of crude oil per day.

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Petroleum Industry Bill to be passed by mid-2020, says Sylva, FG discovers crude oil in north, says there’s more , OPEC, non-OPEC countries to meet as Saudi, Russia price war affects Nigeria’s budget, FG considers fuel price reduction, OPEC deal: Nigeria to generate additional $2.8 billion revenue as FG reacts

As opinions continue to differ on whether OPEC will extend its current oil output cut beyond June, available information has shown that not all members of the oil cartel complied fully with their agreed quotas for the month of May. This is despite the fact that the oil output by OPEC member countries reached its lowest in almost 20 years.

Available data from oilprice.com showed that OPEC members cut their output by 5.91 million barrels per day from the April level, producing 24.77 million barrels per day. This figure also showed a 4.48 million barrel per day of the agreed output cut, thereby representing a 74% compliance level.

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Nigeria and Iraq were reported not to have kept to their commitment to the huge production cut deal that had promised to reduce output by 9.7 million barrels of crude oil per day.

Iraq was able to achieve just 38% compliance of its agreed output cut for the month of May, while Nigeria, which achieved a much lower compliance of the agreed output cut, recorded 19% compliance of what was agreed. Saudi Arabia showed the highest compliance, recording 96% of the agreed output cut.

Some have attributed the noncompliance of some members of OPEC to the agreed output cut, to the contractual obligations and commitment to buyers, given the short timeframe between when the agreement for the output cut was made and its implementation.

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Meanwhile oil exports from Angola and Congo remained steady at high prices on Friday, while Nigerian oil fared lower amid huge inventory of unsold cargoes.

Nigeria continues to face some difficulty in the oil market, primarily due to sluggish demand from Europe; it has around 50 unsold cargoes of crude oil yet to be sold for the months of June and July.

Meanwhile, India has become one of the few buyers for the Nigerian oil. Indian oil firms bought about 5-6 million barrels of Nigerian crude oil last week and has bought about 2 million barrels as at Thursday this week.

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Business News

President Muhammadu Buhari reshuffles NNPC’s board of directors

Note that the former board included the late Chief of Staff to the President, Abba Kyari as a member. Stakeholders have since expected the President to reconstitute a new board to take over.

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President Muhammadu Buhari to address Nigerians on Monday, receives update and recommendations from PTF

President Muhammadu Buhari has approved the reconstitution of the board of the Nigerian National Petroleum Corporation (NNPC) after the expiration of the tenure of the current board.

The newly constituted board members are expected to serve for a tenure of three years, effective immediately. They will take over from the last board, whose 3-year tenure officially ended in 2019. Information about this development is contained in a State House press release that was published on the official twitter handle of the Nigerian Presidency on Saturday morning.

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READ MORE: Construction of ICT Parks nudges Nigeria into digital transformation

READ ALSO: CBN and NIPOST open pilot microfinance branches

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The newly constituted NNPC board is made up of six members from each of the geo-political zones in the country. The members include the following individuals:

  • Mallam Mohammed Lawal, representing the North West
  • Dr Tajudeen Umar from North East
  • Adamu Mahmood  Attah from North Central
  • Senator Magnus Abe from the South-South
  • Dr Stephen Dike from the South East, and
  • Chief Pius Akinyelure from the South West geo-political

READ MORE: Boko Haram: A protracted battle yet to be won?  

Of the six members, three are returning members on the board – Chief Pius Akinyelure, Mallam Mohammed Lawal, and Dr Tajudeen Umar from North East.

Note that the constitution of the new board is considered a welcome development, as it balances the representation of the six geo-political zones on the board. The previous constitution of the board was faulted for not being “balanced”.

READ ALSO: Full text of President Muhammadu Buhari’s 58th Independence day broadcast

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Note that the former board included the late Chief of Staff to the President, Abba Kyari as a member. Stakeholders have since expected the President to reconstitute a new board to take over.

Patricia

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Around the World

Zoom’s market valuation hits $50 billion mark, thanks to COVID-19

Zoom’s share price now trades at an eye-watering 55 times estimated revenue compared with an average of 7 times for information technology stocks in the S&P 500, according to information obtained from Bloomberg.

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Zoom

Zoom Video Communications’ shares surged to record highs on Friday, as bullish runs in the last hours of trading helped the company to close with a market capitalization of more than $50 billion. The stock gained about 9.7% to jump to $179.48, thereby giving it a market value of $50.6 billion. 

Note that this is the first time Zoom’s valuation is reaching this high level since it became a quoted company. The tech giant, which owns popular video conferencing software “Zoom”,  has gained more than 160% this year. This is because investors are betting that the surge in Zoom users amid the COVID-19 pandemic, would eventually translate to long-lasting revenue growth.

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READ ALSO: How VCs are encouraging terrible business practices by founders

Zoom’s share price now trades at an eye-watering 55 times estimated revenue compared with an average of 7 times for information technology stocks in the S&P 500, according to information obtained from Bloomberg.

Following the significant jump in the company’s valuation, the net worth of its founder and Chief Executive Officer, Eric Yuan, also rose significantly by more than $800 million on Friday. He now has a net worth of $9.3 billion, according to the Bloomberg Billionaires Index. 

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Meanwhile, in reaction to Zoom’s overnight success, Gennie Gebhart, a researcher with the Electronic Frontier Foundation, said she hoped Zoom would change course and offer protected video more widely. It should be recalled that some users of the app had raised security concerns back in April, as Nairametrics reported

READ ALSO: Did Satoshi Nakamoto cause the panic sell-off in Bitcoin market

Meanwhile, Zoom has recruited Alex Stamos, a former chief security officer at Facebook, and other top security experts to help deal with the security issues which led to some top companies banning its use. While discussing efforts being made to deal with the security challenges, Stamos told Reuters:

 “At the same time that Zoom is trying to improve security, they are also significantly upgrading their trust and safety. The CEO is looking at different arguments. The current plan is paid customers plus enterprise accounts where the company knows who they are.” 

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