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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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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.

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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.”

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.” 

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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.

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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.

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 France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. Follow Olumide on Twitter @tokunboadesina or email [email protected] He is a Member of the Chartered Financial Analyst Society.

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Economy & Politics

Uganda Elections: Museveni re-elected for 6th term with 58.6% of the votes

Uganda’s President Museveni has won a 6th term in office as the opposition alleges wide-scale rigging.

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The President of Uganda, Yoweri Museveni, has been re-elected as President, gathering 5.85 million votes compared to 3.48 million votes by main opposition leader, Robert Kyagulanyi, a.k.a Bobi Wine.

According to Reuters, this victory represents 58.6% of the vote cast while Bobi Wine got 34.8%

Bobi Wine announced that the election results show this is the most fraudulent election in the history of Uganda and urged his followers to reject the result.

What you should know

  • Yoweri Museveni, aged 76, has been President of the East African nation since 1986.
  • Bobi Wine claimed via his official Twitter handle that military men jumped over his fence and took control of his home yesterday.

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Coronavirus

Combined Vaccine Manufacturing capacity to hit 6.8 billion doses in 2021

COVID-19 vaccine manufacturing capacity is expected to hit 6.8 billion doses in 2021.

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Covid-19: First world nations oppose waiving intellectual rights for vaccine development

Meristem Group disclosed that the combined effort in manufacturing COVID-19 vaccines for global use is expected to yield about 6.8 billion doses in 2021.

This was revealed in the Annual Outlook 2021 report presented by Meristem Group, titled Bracing for a different future.”

According to the report, the existing manufacturing capacity will only be sufficient enough to immunize about 44% of the global population, which would create obvious vaccination gap and make the pandemic last longer than necessary.

The report states,

  • The cold temperature requirements for vaccine storage pose major logistics concern particularly in Sub-Saharan Africa and other low-income countries. WHO estimates that about 50% of vaccines are wasted every year, largely due to a lack of temperature control.”

According to the report, the estimated 6.8billion doses are expected to be collaboratively manufactured as follows:  CanSino – 0.2billion, AstraZeneca – 3.0 billion, Gamaleya – 0.3billion, Moderna – 0.4billion, Pfizer-BioNtech – 1.3billion, SinoPharm – 1billion, and SinoVac – 0.6billion.

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What you should know

  • The global population as of 2020 is 7.8billion and 70% is required to achieve herd immunity (otherwise called herd protection)
  • Herd Immunity or herd protection is achieved when you have most of the population immunized against an infectious disease.
  • 2 doses of the vaccines are required for each person for immunity.
  • It is expected that between 11 and 15 billion doses would be required to achieve the desired herd immunity, globally.
  • From all indications, herd immunity may not be achieved until mid or late 2022, with the subsisting 100% vaccine production capacity utilization in 2021 – with neither production nor distribution losses.
  • To achieve regulatory approval, a vaccine must undergo a three-stage clinical development process after the exploratory and pre-clinical stages and the U.S Food and Drug Administration (FDA) sets a phase 3 efficacy benchmark of 50%.

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Coronavirus

Covid-19: Global deaths surpass 2 million

Global casualty record for the Covid-19 pandemic surpassed 2 million deaths on Friday.

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Nigeria blows past 40,000 COVID-19 cases

The Global casualty record for the Covid-19 pandemic surpassed 2 million deaths on Friday, with the United States accounting for 1 in every 5 deaths, as it has recorded over 386,000 casualties so far.

This was disclosed in a report by Reuters in its Covid-19 tally reported on Friday evening.

After the United States, Brazil, Mexico, India and the U.K contribute nearly 50% of the combined casualties.

The report also disclosed that an average of 11,900 casualties are recorded per day in year 2021, despite the fact that it took 9 months for the world to record 1 million casualties.

United Nations Secretary-General, Antonio Guterres, said the 2 million death count was “a heart-wrenching milestone.”

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  • “Behind this staggering number are names and faces: the smile now only a memory, the seat forever empty at the dinner table, the room that echoes with the silence of a loved one,” he added.

The WHO warned that 2021 could be tougher due to the nature of new variants which transmit the disease faster.

  • “We are going into a second year of this. It could even be tougher given the transmission dynamics and some of the issues that we are seeing,” WHO Chief, Mike Ryan, said.

Analysts expect the global death toll to surpass 3 million by April 2021.

What you should know 

  • Nairametrics reported that the total number of covid-19 cases in Nigeria had surpassed the 100,000 mark on Sunday 10th January 2021, according to the Nigeria Centre for Disease Control.
  • The African Union stated that it secured 270 million Covid-19 vaccine doses for the continent from drug manufacturers to supplement the COVAX programme, a step towards the commencement of the complex task of vaccinating over 1.2 billion people with limited financial resources.
  • The Nigeria Centre for Disease Control on Friday 15th January 2021, announced that 1,867 new cases of the covid-19 virus were recorded across 24 states in the country. This represents the highest number of cases recorded in a single day.

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