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COVID-19 to weaken Nigerian banks’ assets in 2020- Report

The outbreak of the coronavirus disease has worsened the outlook for Nigeria’s hitherto fragile economy due to the pandemic. 

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Nigerian Banks, Fitch

The outbreak of the coronavirus disease has come with economic and health crises in most countries. The outlook for Nigeria’s hitherto fragile economy has worsened due to this pandemic.

The Nigerian banking industry has had its fair share of the macro-economic headwinds, which has resulted in declining margins and significant write-offs of impaired loans. While on the path to recovery, the banking industry is now faced with the coronavirus pandemic, which comes with greater uncertainties and unpredictability of events in the business environment.

Augusto & Co, in its report, assessed the impact of the coronavirus pandemic on the asset quality of the Nigerian banks. According to the agency, the banks are significantly exposed to several sectors which include the oil and gas sector, manufacturing, real estate, public sector, construction and general commerce. In addition, about 47% of the banking industry’s gross loans are in foreign currency.

(READ MORE:Recapitalisation: CBN extends deadline for microfinance banks)

The report suggests that the coronavirus pandemic will weaken the asset quality of the Nigerian banks in view of the impact on State Governments’ finances, purchasing power of households and the performance of businesses. Although the degree of impact will vary across different sectors, the key sectors that will bear the brunt are oil and gas (upstream), real estate, construction, transportation (aviation) and manufacturing (non-essentials).

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Impact of coronavirus pandemic on asset quality of Nigerian banks

Also, the sectorial allocation of these loan portfolios will determine the extent to which the asset quality will deteriorate.

The exposure of the banking industry to the above mentioned vulnerable sectors threatens asset quality for the following reasons:

  • Firstly, the decline in global crude oil prices which was triggered by the slump in demand due to economic lockdowns in several countries will result in a sharp reduction of revenue for the oil and gas firms and government. The revenue from oil accounts for about 60% of the country’s revenue and about 90% of its export proceeds. Being the largest spender, a decline in the government’s revenue will affect key sectors such as construction, manufacturing, real estate and general commerce.

In addition, the Central Bank’s ability to defend the naira is threatened by lower foreign exchange earnings, which results in weaker macroeconomic indicators (such as high inflation and currency depreciation) and directly affects businesses and households.

(READ MORE: Possible impacts of last week’s CRR debit on banks’ balances by the CBN)

  • Secondly, an anticipated further devaluation of the naira will bloat the industry’s foreign currency loan book, which is dominated by the oil and gas, manufacturing, general commerce and other import-dependent sectors. This could weaken capitalization ratios via higher risk-weighted assets and increase the level of delinquent FCY loans.
  • Thirdly, the disruption in the global supply chains is expected to increase demand for domestic alternatives for inputs used in the manufacturing sector. While this is good for the domestic market, the higher cost implications will adversely impact the margins of producers, as increased costs are not easily transferable to final consumers, especially in a period of weakened consumer purchasing power.
  • Fourthly, the revenues of most businesses in the ‘non-essential’ manufacturing sectors will be hit by the general lockdown in the largest commercial centres in Nigeria.

With the slower than expected progress in tests that have been carried out for the coronavirus disease, the country faces increasing uncertainties that will push it into recession with 7% contraction in 2020.

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Subsequently, the report revised non-performing loan ratio expectations to 13% in the short term due to the coronavirus pandemic as against the initial 9.4%. This is based on the assumption that the average crude oil price will be $30-$35 per barrel.

Chike Olisah is a graduate of accountancy with over 15 years working experience in the financial service sector. He has worked in research and marketing departments of three top commercial banks. Chike is a senior member of the Nairametrics Editorial Team. You may contact him via his email- [email protected]

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Coronavirus

COVID-19: Russia produces first batch of its newly approved vaccine

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COVID-19: J&J starts vaccine trials on humans after success on monkeys

Russia announced on Saturday, August 15, 2020, that it has produced the first batch of its newly approved vaccine, Sputnik V, hours after the health ministry reported the start of its production.

The disclosure was made in a statement by the Russian Health Ministry and quoted by Russian news agencies.

This is coming some days after the Russian President, Vladimir Putin, announced the registration of the world’s first COVID-19 vaccine in what could be described as a step ahead of other vaccine developments.

The announcement is seen as a propaganda coup for the Russian government against the west amid a global race to develop vaccines against the coronavirus disease.

The announcement of the vaccine registration by Putin was met with caution from scientists and the World Health Organization (WHO), who said that it still needed a rigorous safety review. Some of the scientists fear that with this fast regulatory approval, Russia may be putting national prestige ahead of safety.

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Putin had said the vaccine was safe and that one of his own daughters had been inoculated, although the final stage testing involving over 2,000 people just started this week. Such trials are considered very important before a vaccine can secure regulatory approval.

Russia has said the vaccine which is the first for the coronavirus disease to go into production, will be rolled out by the end of August.

The Gamaleya Research Institute, which developed the vaccine in collaboration with the Russian Defence Ministry, said that Russia would be producing about 5 million doses a month by December or January.

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Companies

Heineken scoops more Nigerian Breweries shares in insider disclosure

The company has about 8 billion shares outstanding with Heineken as the majority shareholder.

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Nigerian Breweries major shareholder, Heineken disclosed it purchased 274,542 units at an average price N35.76 per unit.

Insider disclosures are reported on the Nigerian Stock Exchange as a regulatory requirement especially when it informs a major shareholder or director of a company purchasing shares in the company they own.

In a related development, its chairman Chief Kolawole Babalola Jamodu also purchased 10,000 units at N37 per unit.

Nigeria Breweries closed at N36 per share on Friday trading at a price to earnings of 34x. The company has about 8 billion shares outstanding with Heineken as the majority shareholder.

What this means: Insider purchases are often an indication of how shareholders perceive the company’s valuation. It can also mean a lot of things from a possible capital raise to a strengthening of their existing holdings.

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Nigerian Breweries has struggled for growth over the last few years as consumers continue to experience a change to taste and preference for alcohol.

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Business

Lagos announces additional tax incentives for businesses, individuals

Waiver of penalty for late payment of liabilities under PAYE that were due during the period when the state was under lockdown.

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LIRS further extends deadline for filing annual return by one month

The Lagos State Government has announced additional tax incentives and reliefs for businesses and individuals in the state, as part of measures aimed at reducing the burden on taxpayers amid the COVID-19 pandemic.

The disclosure was made in a public notice issued by the Lagos State Internal Revenue Service (LIRS) and signed by its Executive Chairman, Ayodele Subair.

The additional tax incentives are part of the several measures implemented by the LIRS to mitigate the impact of the coronavirus pandemic on taxpayers in Lagos and ensure business continuity.

The government had earlier given 3 months extension of deadline for filing annual returns from March 31 to June 30, 2020.

The additional measures being implemented by the state government include:

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  • LIRS shall be allowing on a case by case basis, the payment of outstanding liabilities in instalments to ease cash flow challenges that may affect taxpayers.
  • Waiver of penalty for late payment of liabilities under PAYE that were due during the period when the state was under lockdown (March-May 2020).
  • Waiver of penalties due on late filing of 2020 annual tax returns (Form A).
  • Waiver of interest and penalty components of outstanding tax audit liabilities from 2009 to 2015 for entities that present and keep to a structured payment plan that terminates on or before December 31, 2020.
  • Grant of tax credits of 20% of cash and kind donations made for COVID-19 by resident individuals to Lagos State Government for the 2021 Year of Assessment only subject to a cap of 35% of tax due.
  • Increase of payment channels to make payment of taxes easier, simpler and more convenient for all.
  • Adopting of video conferencing as the default mode for conduct of Tax Audit Reconciliation Committee (TARC) meetings in consonance with social distancing advisories from Government and other relevant authorities.

The Lagos state government expressed hope that all residents of the state would take advantage of these palliatives and reciprocate the government’s kind gestures by discharging their civic responsibilities by promptly paying their taxes and levies to the state.

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