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Oil firms’ debt status: How it affects Nigerian banks

The financial approach used by Nigeria’s oil companies against lower oil prices will affect their chances of making it through.

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Nigerian Banks, Fitch

The financial approach used by Nigeria’s oil companies against lower oil prices will affect their chances of making it through and negatively affect their financial lenders.

It is obvious that some of the most over-leveraged oil companies in Nigeria will not survive the current price collapse due to bad debts while other conservatively managed oil companies will start the process into restructuring their debts with their lenders if the current level of crude oil price is maintained for many weeks.

The financial health of energy companies based in Nigeria and their resolve to service their debts are extremely vital to the banking industry of Nigeria.

Oil companies accounted for about 30% of all banking-sector loans recorded in the third quarter of 2019, and their borrowing took about 24% of all non-performing loans in Nigeria.

[READ MORE: Nigerian banks’ non-performing loans drop significantly by 41% in 2019)

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Commercial banks in Nigeria with heavy exposure to Nigerian oil producers include Nigeria tier-one banks. The oil price plunging along with the devaluation of the naira has indirect effects on the Nigerian banking industry.

Nigeria's crude oil production, Crude Oil: Nigeria's volatile oil sector and economic progress   

Princejoe Nnaji, a Management expert in a leading bank in Nigeria told Nairametrics in a phone chat that, “I don’t foresee global demand increasing significantly and project that crude oil prices will remain low throughout this 2nd Quarter putting Nigeria Banks at risk to oil company’s exposure once again. This would impact 3 key aspects:

“Just as the drop in crude oil prices is expected to breach the Nigerian government’s 2020 projected revenues, the commercial banks are not exempted from this effect because there will an extension of moratorium periods and loan repayments and a significant drop in new debt to oil companies as Nigerian banks seek to proactively prevent a 2015 oil crisis déjà vu. This would surely lead to a fall in the Interest and Non-Interest Income banks have projected to earn from oil companies.

Slight Up-Tick In NPLs: While banks focus on negotiating with local oil companies to restructure their loans in line with current realities, it is expected that all banks will migrate a significant portion of oil companies exposure due within the next 12 months from Stage 1 to Stage 2. That should be based on the IFRS 9 requirement on expected credit loss because the probability of default variable has increased and the small companies would most likely default.

 “I, however, don’t see it affecting banks the way it did in 2015, as banks have learnt from the past by reducing previously breached single obligor limits and improved the strength of collaterals to adequately cover loans.”

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Downgrade by Rating Agencies:Nnaji explained that in 2020, credit ratings agency ‘Fitch’ has downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’ and placed 10 Nigerian banks on a Negative watch.

He said, “Given the possibility that the quality of oil companies loan asset may deteriorate significantly depending on the duration of the pandemic and continued impact on oil prices, several banks aside the current top 3 profitable banks are going to be downgraded.” 

Indigenous oil and gas companies are expected to struggle as oil prices continue to decline. It’s expected that a moratorium on debt repayments will be worked out between banks and oil-producing companies in Nigeria.

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

Price swings usually bring its own good moments for those who have refrained from excessive borrowing. The crude oil price slump creates opportunities for cash-rich oil businesses and oil companies with low leverage exposure in selecting excellent producing assets at a bargain.

However, naira devaluation may also provide some comfort for Nigerian banks as the financial results posted by some of them showed significant asset holdings in dollars, as they predicted naira devaluation would happen at some point. So they will most likely make some revaluations gains from the naira weakening against the dollar.

Meanwhile, Nairametrics had reported commercial banks in Nigeria are set to begin the recovery of N6.125 trillion borrowed by oil firms to braze themselves amidst the sector’s recapitalization fears.

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READ MORE: CBN stops oil companies from selling dollar to NNPC, here’s why

The banks have reportedly issued correspondences to oil firms, marginal filed operators and downstream operators, as debts in the sector, according to a 2018 CBN financial stability report, showed that N1.235 trillion had been added to the sector’s debt profile since 2016 when it stood at N4.89 trillion.

Banks are beginning to takeover collateral tied to the loans, a management staff of one the marginal field oil firms reportedly said over the weekend, as banks followed up on the correspondence sent to his firm.

Olumide Adesina is a French-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment Trading. A member of the Chartered Financial Analyst Society. Financial Market; Yale University, Behavioral Finance; Duke University. You can follow Olumide on twitter @tokunboadesina or email [email protected]

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Business

Nigeria to begin gold production in 2021 with the Segilola Gold Project

The gold produced is expected to become a part of Nigeria’s external reserve.

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Nigeria to save $300 million from importation of barite 

Nigeria is set to commence gold production in 2021 after the launch of the Segilola Gold Project in Osun state. This was disclosed by the Honourable Minister of Mines and Steel Development, Olamilekan Adegbite, while taking stock of his first year in office as Minister.

In a statement signed by his Special Adviser on Media, Ayodeji Adeyemi, Adegbite said that the project is expected to create about direct 400 direct jobs and 1000 indirect jobs along the gold value chain.

He added that once the project takes off, Nigeria would become a major gold producing country, a move that would hasten the diversification of the economy and reduce unemployment among the youth populace.

He noted that the government was creating an enabling environment across the gold value chain. According to him, “the international roadshows we have had in the past have borne fruits. Today we have Thor exploration in Osun State through the Segilola Gold project, which is projected to start producing in the first half of next year.”

The minister also noted that the government has licenced two gold refineries to refine gold to the London Bullion Market Association, LBMA, standard.

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About the Ajaokuta Steel Plant, Adegbite explained that the global travel restriction caused by the pandemic had prevented the technical experts from Russia from coming over to the plant to conduct an audit of the steel plant. He assured that this would be done as soon as the flight restriction was over, and there are hopes to revive the plant before the expiration of President Buhari’s tenure.

Why it matters

The take-off of gold production in Nigeria is expected to open up an industry centred around gold production, from equipment leasing and repairs, logistic and transport. Note that gold requires a specialized means of transport, security, insurance, aggregators among others. These, according to Adegbite, would ultimately create tens of thousands of jobs across the gold value chain.

The minister further stated that Nigeria has mined, processed, and refined gold under the Presidential Artisanal Gold Mining Development Initiative, PAGMI. The first batch of PAGMI gold was unveiled at a presentation ceremony to President Buhari on July 16, 2020.

The gold produced is expected to become a part of Nigeria’s external reserve after being purchased by the Central Bank.

“PAGMI will result in the creation of thousands of new mining and formalized jobs, leading to poverty alleviation for many households. Under the scheme, artisanal and small scale gold miners will earn more from higher productivity, better recovery rates through mechanization of operations, and better access to reliable geological information,” he said.

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Business

AGF launches Committee on Financial Transparency Guidelines and Open Treasury Portal

This initiative will provide the public with financial information of all MDAs.

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Office of Nigeria's Account General is reportedly engulfed in flames, Auditor-General, Accountant-General, grants, FAAC disburses N327.68 billion to States and LGAs in September, as allocation drops again,

Office of the Accountant-General of the Federation has launched a Committee on Federal Government Financial Transparency Guidelines and Open Treasury Portal to enable Transparency on economic governance policy.

Speaking during the launch today in Abuja, the Accountant-General of the Federation, Ahmed Idris, FCNA, said the committee would provide the public with financial information of all MDAs to promote accountability and anti-corruption campaign.

The AGF said that the Honourable Minister of Finance and National Planning (HMFBNP) had in July 2018, presented a memo to the Federal Executive Council (FEC) for the approval to establish the Financial Transparency Guidelines and Open Treasury Portal.

“The approved Transparency Policy provides for Transparency requirements, thresholds and responsibilities as part of Government Policy on accountability in line with Freedom of Information Act 2014.

“The HMFBNP, then constituted the composition of the Quality Assurance and Compliance Committee which membership were drawn from MDAs,” he said.

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Idris said that the Committee would implement transparent governance and improve the FG’s whistleblowing programme, which would help Nigerians report financial crimes in the MDAs.

He disclosed that the operations of the committee would be accounted through the Office of the Accountant-General of the Federation which will offer its secretariat services to the committee, and enable the committee request information and clarification.

Idris added that the Committee would report to the Accountant General and the Minister of Finance, Zainab Ahmed monthly, citing that the Committee would work transparently “without fear or favour”.

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Economy & Politics

FG meets group to access AfCFTA’s $650 billion market

AfCFTA is aligned to the ministry’s twin national objectives of industrialization and export based diversification.

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UNIDO’s $60m investment programme to boost Nigeria’s industrialisation - FG, FG to strengthen economic ties with Turkey, FG moves to facilitate tax incentives for SMEs, Made-in-Nigeria vehicles gulp N364 billion from FG

The Ministry of Industry, Trade and Investment has met with executives of the Nigerian Agribusiness Group (NABG) on the implementation of the African Continental Free Trade Area (AfCFTA) and access the continent’s market worth $659 billion, in mostly manufacturing goods and services.

This was disclosed by the Minister of Industry, Trade and Investment, Otunba Niyi Adebayo during the meeting on Monday.

The minister emphasized on the importance of AfCFTA, as it is aligned to the ministry’s twin national objectives of industrialization and export based diversification. It provides us with a preferential access to African market worth over $650bn, in mostly manufactured goods .

Back story: Nairametrics had reported when Aissata Koffi Yameogo, ECOWAS’ Programmes Officer in charge of implementing AfCFTA rules of origin in the continent, said that the implementation will expand market for the manufacturing industry to 1.3 billion West African citizens, without additional duties and fees.

“It will build production capacity in the region and develop the value chain, and increased export to other African states” she added.

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The benefits would also encourage member states to specialise in the production of a certain good where they have a comparative advantage, thus enhancing the quality and quantity of local production and creating more jobs.

He said, “This would improve our competitiveness and the perception of our products and services in the African market. Intra-African trade in Agro products and services will develop our local value chain, create jobs and increase our GDP.”

According to International Monetary Fund (IMF), the elimination of tariffs could boost trade in Africa by 15-25% in the medium term, and once fully implemented, is expected to cover all 55 African countries, with a combined GDP of about US$2.2 trillion.

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