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Banks that hedged against 2020 Oil price crash

Nigerian banks claim they have protected themselves against a potential loan crisis in the oil and gas sector. But is it enough?

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Banks that hedged against 2020 Oil price crash

Some major commercial Banks in Nigeria appear to have hedged against the current crash in crude oil prices mitigating against their risk to higher non-performing loans. A banking sector report seen by Nairametrics indicates some of the Tier 1 banks secured some hedges against the fall in oil prices protecting themselves from taking significant loan losses.

Banks with crude oil Exposure

A Nairametrics article had reported how much risk banks face this year due to debt from independent oil producers. According to data from the National Bureau of Statistics Nigerian banks as of 2019 reveal total loans to the Oil and Gas sector was N4.5 trillion down from N4.6 trillion in 2018. Out of the N4.5 trillion reported in 2019 N3.4 trillion was to the upstream sector. Total credit to the private sector was N17 trillion as at the end of December 2020.

Some analysts who spoke to Nairametrics on the condition of anonymity believe the banking sector may be underestimating the extent of the effect of the oil price crash on the financial health of the banks. “For now it looks like they have a plan until they start declaring loss” one analysis chided.

READ ALSO: Why NNPC may sack depot managers

How banks protected themselves

Research conducted by Nairametrics reveals most banks are relying on restructuring, collateral, and quality of debtors to protect themselves against an impending crystallization of oil and gas loans.

The CBN had hinted a few weeks ago that it will accommodate loan restructuring for most debtors of commercial banks as part of its palliatives to deal with the twin shock of a health pandemic and a fall in crude oil prices. Some banks also took on cash collaterals against their borrowers as additional security in the event that oil companies are unable to repay the loans.

Some banks also learned their lessons from the 2015/2016 crash and reduced their exposure to local oil-producing companies focussing mainly on IOCs. It is unclear how these protective measures will aid banks in the coming weeks and months when the effect of the crude oil prices start to reflect on the balance sheet of banks.

While nearly all the banks plan to restructure loans or call on their security in the event of a default, some did take out financial instruments such as hedging.

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READ MORE: Nigerian crude producers smashed by low crude oil prices


Nairametrics looked into the financial statements of some of the top commercial banks for information on their total loan exposures to the sector and how they plan to protect themselves.

GT Bank: According to the information contained in the 2019 FY financial statements of the bank, as a percentage of total loans, GTB had the most exposure to the oil and gas sector with about N606 billion. The bank has released its 2020 first-quarter results but did not breakdown loans by sector.

GTB’s total exposure to the oil and gas sector is about 41% of its total loans out of which exposure to the upstream of the sector was 28%. However, an exclusive report that was seen by Nairametrics indicates the bank took out a hedge against a drop in crude oil prices. According to the report, the bank’s CEO had mentioned to investors on its 2019 earnings call that the bank had hedged its upstream loans at $50/bl till at least 2021. A financial hedge is an instrument taking by investors to protect themselves against a fall of a commodity or investment.

Zenith Bank: One of Nigeria’s largest banks by profitability has about N619 billion in exposure to the oil and gas sector as of December 2019. The exposure represents about 24% of the bank’s total credit of N2.46 trillion (gross loans). Out of the Bank’s N619 billion loan, 14.6% represents exposure to the upstream sector while 10.6% of its loans are to the downstream sector. About 30% of the bank’s 4.3% non-performing loans are from its oil and gas sector.

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Zenith Bank did not particularly reveal what hedges it has but it claims that it has put in place “some hedges” to protect itself from a crash in crude oil prices. Zenith Bank’s total exposure to the sector is about $1.5 billion. As an additional protective measure, Zenith Bank reports that it had also restructured about N406.4 billion of its loans.

READ MORE: Fitch rates 3 Nigerian banks lower to ‘B’, places others on negative watch

Stanbic IBTC claims 15% of its total loans of N556 billion (gross) is exposed to the upstream sector. The bank claims 3% of the loans are currently non-performing. OIl and gas loans also make up about 45% of the bank’s total foreign currency exposures. Stanbic does not category state how much it hedged but it claims it had hedged “a portion of its loan books” and that most of its loans were to IOCs.

Access Bank – For Nigeria’s largest bank by balance sheet about N240.9 billion or 7.7% of its N3.1 billion loans are exposed to the upstream sector. Another N480 billion in exposed to the Oil and Gas services sector (one of the highest) while N148.7 billion is exposed to the downstream sector. The bank claims 1.1% of its non-performing loans were from the oil and gas upstream sector. The bank did not report that it had any hedging instruments for its oil and gas loans.

FBNH – Nigeria’s oldest bank, First Bank has a total of N1.7 trillion about 18%, 8%, and 9% is exposed to the Upstream, Services, and downstream sections respectively. The bank did not reveal if it hedged any of its loans.

UBA’s total loan portfolio of about N2.1 trillion included N371 billion in oil and gas loans. The bank did not breakdown its oil and gas exposures into upstream, downstream, or services.

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Banks appear to be more experienced this time around compared to 2015/2016. A string of results released last week by some banks reveals profitability growth for the first quarter of this year. This is despite the effects of Covid-19 on the global and the local economy. The oil price crash which began in earnest in February 2020 is also yet to reflect. Time will tell.

Nairametrics Research team tracks, collates, maintains and manages a rich database of macro-economic and micro-economic data from Nigeria and Africa. Our analysts share some of the data collated on Nairametrics, using formats such as docs, tables and charts etc. The team also publishes research based analysis as articles on a regular basis.

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    Companies

    COVID-19, VAT, FX scarcity adversely impacted our operations in 2020 – Nigerian Breweries boss says

    NB Plc’s operations in 2020 were adversely impacted by the COVID-19 pandemic, VAT increase and FX devaluation.

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    Heineken scoops more Nigerian Breweries shares in insider disclosure

    The management of Nigeria’s leading brewer, Nigerian Breweries Plc has revealed that its operations in 2020 were adversely impacted by the COVID-19 pandemic, VAT increase, FX devaluation and scarcity of foreign exchange.

    This statement was made by the Managing Director of Nigerian Breweries, Mr Jordi Borrut Bel, at the company’s pre-AGM media briefing for the financial year-end 2020, which held in Lagos this week.

    He noted that the increase in the brewer’s cost in 2020 was due to the COVID-19 pandemic which disrupted the company’s operations, as well as the increase in VAT, devaluation and FX scarcity which has put pressure on input cost.

    READ: Alcoholic beverage makers on NSE lose a total N27.7 billion in a single day

    The Nigerian Breweries boss explained further that the increase in cost could not be fully attributed to currency devaluation and foreign exchange scarcity.

    He explained that the increase in costs of goods sold, as reported in its audited financial results, could also be linked to the increase in the volume of goods sold, as the company’s sales volume in 2020 increased by almost the same percentage as the cost of goods sold.

    To deal with this challenge going forward, he revealed that the company is focused on the supply chain, and will continue to seek out ways to mitigate any of the price increases coming from FX scarcity.

    READ: Brewery sector: A quarter to forget

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    The company’s profitability in question?

    An analysis of the company’s result revealed that despite the 4.3% increase in net revenue from N323.00 billion recorded in 2019, to a total of N337.01 billion in 2020, the company’s profit declined significantly by 53.3% to N7.53 billion.

    Speaking on this, Jordi Borrut in his statement at the press briefing noted that the brewer’s business performance in 2020 was quite impressive especially in the face of the COVID-19 pandemic and economic recession. Despite these challenges, the company maintained a strong and healthy balance sheet.

    There was a slight reduction in profitability but compared to the previous year, the business witnessed an improved growth in revenue. The significance of this is that the business became more stable and healthier,” he said.

    READ: Nigeria’s triangular beer war on the rise with the arrival of Budweiser

    What you should know

    • Nigerian breweries, being the largest brewer in the country, maintained its stance in terms of generating profits year-on-year. The company emerged as the only brewer to record a profit of N7.37 billion from its operations in 2020, 54.3% lower than 2019 figures (N16.1 billion).
    • From this, the leading brewer was able to pay shareholders a total dividend of N7.5 billion, translating to a dividend of 94 kobos per share – a dividend payout in which exceeds 100%.
    • While Guinness and International Breweries made a loss of N12.6 billion and N24.9 billion respectively, this reality impacted their ability to pay their shareholders dividends in 2020.

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    Business News

    Highest paid Nigerian bank MD/CEOs of 2020

    Bank MD/CEOs in Nigeria earned a combined N1.5 billion in salaries in 2020.

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    The banking sector, especially commercial banks, is one of the most profitable sectors of the Nigerian Economy churning out profits of close to a trillion in 2020 alone. They are also one of the highest employers of labours in the country employing over 93,000 Nigerians.

    Sitting at the helm of affairs is the Chief Executive/Managing Director, the highest-ranking executive in the organization saddled with the responsibility of making the best corporate decisions, oversight of the execution of the organisation’s corporate strategies and most importantly increasing the shareholders’ return. The buck basically stops on their table.

    Thus, these enormous responsibilities also come with a considerable executive compensation for their service making them ostensibly the highest-ranking staff of the bank.

    READ: Jim Ovia: From a clerk to founder of Nigeria’s most profitable bank

    In typical Nairametrics fashion, we bring to you a list of the highest-ranking bank CEOs for 2020 based on their executive compensation (exec comps). The bank MD/CEOs under our review earned over N1.5 billion in salaries in 2020.

    The data was sourced from the published audited accounts of the bank and verified by Nairametrics Research.

     

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