Recently, there has been growing media speculations over the possibility that Nigerian banks might become adversely affected by the prevalent global oil crisis.
One article by Nairametrics had declared that banks were at risk due to the perceived inability of indigenous oil companies to repay their loans. While this worry is not entirely without merit, some experts who spoke to Nairametrics have assured that the situation is not as serious as some people believe it to be.
Banks they claim, have learnt from the lessons of the 2015-2016 oil crisis and took bold steps to mitigate against their downside risks.
What the experts are saying
According to the Director of Sales at Chapel Hill Denham, Lanre Buluro, banks’ loans to the oil and gas sector are really not as bad as people think. As a matter of fact, debts owed by the upstream oil sector (which is directly involved in crude exploration and has, unfortunately, been hit hard by the global oil price slump), only represent about 19%-25% of banks’ loan books.
In his emailed response to Nairametrics’ inquiries, Buluro said:
“The oil & gas book in banks is not as bad as people think, particularly the upstream subsector. The upstream book is about 19%-25% of loans. Of course, given the current environment, there is a concern. From our talks with management, they are watching the situation.”
Measures are in place to handle the situation
Buluro further explained that some lenders already have measures in place aimed at mitigating the adverse effects of any possible oil price crash.
One of such measures entails hedging production at $45 per barrel as part of the loan terms. With this hedge in place, oil companies are bound to meet their loan obligations despite the recent downturns.
An earlier analysis by Nairametrics Research listed out the names of the banks that did this.
“In the meantime, some companies (banks) have already begun to slash their CAPEX and will most likely cut dividend payouts in 2020,” Buluro disclosed.
These moves are expected to generally help them to manage their costs of operation, as they try to cope with the harsh economic challenges posed by recent global events.
Buluro also highlighted other measures some of them might be taking to protect themselves. He said:
“The good banks will take prudent measures and take provisions (eg. GTBank and Stanbic IBTC). If the risk doesn’t crystalize, it will be a written back which is accretive for earnings. And in the event some borrowers struggle, banks will restructure the loans – defer principal payments, elongate tenure.”
Should banks consider lending less to the oil and gas sector?
Bearing in mind that this is not the first time Nigerian banks have had to grapple with this kind of challenge due to their exposure to the oil and gas sector, we wanted to find out if it is high time banks rethought their lending to the sector. In other words, should they, perhaps, consider lending less to oil and gas companies going forward? Mr. Buluro does not think this is possible.
“In terms of lending less to the sector, it is impossible. The sector is a critical part of the economy. While its 9% of GDP, it is still responsible for 90% of USD revenue for the govt. There are strong names in the sector with considerable reserves (most loans are reserve-based lending).
“Also, banks have a dollar book and have to lend dollars, so the oil & gas sector is a prime customer for those dollars. There are other portions of the bank loan books that are riskier (retail, manufacturing, and general commerce) and have bigger NPL implications.
“Note that banks have learnt their lessons from the past and are structuring loans with a better understanding of the risks,” he said.
Similarly, a former banker and the Principal Consultant at Hatytude Consultancy Services Limited, Femi Hassan, said he does not think “the oil price crash will necessarily determine how banks will lend to the oil companies going forward.” This is because most banks have learnt from past events and are now more careful by introducing hedges when lending.
Latest results from Nigerian banks largely indicate higher profits as the effect of the Coronavirus induced lockdowns is yet to be captured. However, it is expected that Q2 results will come under significant strain as banks recalibrate their loan books and assess their cost. Some banks have already taken bold steps by cutting down on payroll costs. Access Bank recently announced a 40% slash in payroll cost.
The banking index of the Nigerian Stock Exchange gained 15% in April, perhaps an indication that investors see a bright spot amidst the doom and gloom. Time will tell whether the light will remain as bright.
CBN extends Covid-19 forbearance for intervention loans by another 12 months
CBN will continue to charge an interest rate of 5% for its intervention loans for another 1 year.
The Central Bank of Nigeria has announced an extension of its regulatory forbearance for the restructuring of its intervention facilities by another 12 months.
In a circular signed by Dr. Kevin Amugo, the Director of Financial Policy and Regulatory. the apex bank said it will continue to charge its borrowers an interest rate of 5% per annum as against the 9% originally offered. The CBN had on March 20th reduced the interest rates on its intervention loans from 9% to 5% as part of its response to the economic crunch brought on by Covid-19 induced lockdowns.
The CBN also offered to rollover moratorium granted on all principal payments on a case by case basis. All credit facilities had been granted a one-year moratorium starting from march 1, 2020 when the pandemic first gripped Nigeria.
See excerpt from Circular
“The Central Bank of Nigeria reduced the interest rates on the CBN intervention facilities from 9% to 5% per annum for one-year effective March 1, 2020, as part of measures to mitigate the negative impact of COVID-19 Pandemic on the Nigerian economy.”
Credit facilities, availed through participating banks and OFIs, were also granted a one-year moratorium on all principal payments with effect from March 1, 2020.
Following the expiration of the above timelines, the CBN hereby approves as follows:
1) The extension by another twelve (12) months to February 28, 2022 of the discounted interest rate for the CBN intervention facilities;
2) The roll-over of the moratorium on the above facilities shall be considered on a case by case basis.
What this means
Companies who secured intervention funds from the CBN or through any of its on-lending banks will continue to service the loans at an interest rate of 5% per annum instead of 9%.
- They can also get another year of not needing to pay back the principal sum collection. However, they will need to apply.
- Whilst this move helps the small businesses continue to manage their cash flow, it means the CBN will record a reduction in its income extended under such facility.
- Regulatory forbearance is a widely adopted concept during an economic crunch and it is meant to help stimulate businesses. These pronouncements if implemented will only affect those who borrow from the CBN or BOI but those who do not will miss out.
- Download the circular here.
LNG boss tasks FG to begin the monetization of Nigeria’s gas
Mr Attah has urged the FG to take the gas sector more seriously as the future of Nigeria’s energy lies with it.
The MD and CEO of Nigeria LNG Limited Mr. Tony Attah has tasked the Federal Government to begin the revamping and monetization of the Gas sector in Nigeria.
He made this statement while making his presentation at the 2nd virtual Nigerian Gas Association (NGA) Industry Multilogues, with the theme: “Powering Forward, Enabling Nigeria’s Industrialization via Gas.”
Mr. Tony Attah drew the attention of the audience to the hidden treasure in the Nigerian Gas industry which he believes is not getting enough attention from the government.
On the future of gas as an alternative energy source, Mr. Attah stated that the developed world is already keying into gas as an alternative to crude oil. Gas has proven to be a cleaner and more sustainable alternative.
He exclaimed that Nigeria is very rich in gas and yet poor in energy. Nigeria is the 9th country with the largest gas reserves in the world but makes very little use of it.
Mr. Attah went further to paint a clear picture of the promise of investing in gas using the success achieved by Qatar. Qatar is currently the largest LNG exporter in the world.
“We just touched on a quick case study of Qatar. Someone mentioned Qatar already from a poor fishing country to a gas giant and it took just 10 years, which is why we, as Nigeria LNG, firmly believe in the conversation and the narrative about the declaration of the decade of gas.
“We believe it is possible. If you look at Qatar from 1995, when they really went into gas development, we were just two years behind Qatar. So, Qatar’s first LNG was in 1997.
“Nigeria’s first LNG was in 1999, just two years behind. But then, within 10 years, because of the deliberateness of the government and focus on gas, they have gone to 77 million tonnes and we are at best, 22 million tonnes,” Attah said.
Mr. Attah stressed further the importance of the gas sector in Nigeria’s future. He recalled that the Nigerian Government declared 2021-2030 as the decade of gas. He pleaded with the government to take the sector more seriously as the future of Nigeria’s energy lies with it.
“Gas is the future. That future is now, and just as the Minister of State has made us to realize, gas is food in fertilizer. Gas is transport as you saw in the Auto gas project that was declared.
“Gas is life, as a matter of fact, for cooking, for heating, for existence. Gas is development in manufacturing, gas is power. Gas is everything. “We think it’s time for gas. It’s time for Nigeria to diversify and that is why we fully support the decade of gas,” he said.
What you should know
- Early last year, the director of the Department of Petroleum Resources (DPR) Mr Sarki Auwalu confirmed that Nigeria’s proven gas reserve stood at 203.16 trillion cubic feet.
- Nigeria has the 9th largest gas reserves in the world. It is also the 6th largest exporter of gas.
- The Federal Government declared the year 2021–2030 as the “Year of the Gas“. It pledged to finally kick start the development and commercialization of Nigeria’s huge gas reserves.
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