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Ratings firm explains why bank non-performing loans could be worse than expected

The coronavirus pandemic has forced a change in its outlook for non-performing loans.

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The coronavirus pandemic has triggered unprecedented challenges for the global economy. The financial sector is being closely watched considering its exposure to risky assets.  The situation is the same in Nigeria and as the economy gradually reopens, attention is now pointing towards Nigerian banks and how bad their risk assets are.

Nairametrics did a report last week detailing banks that are exposed to oil and gas, a sector that is more than any devastatingly affected by the global lockdown. We continue to focus on this sector as we review reports and publications that could provide an insight into what might befall banks.

One of such report is that of  Augusto & Co Limited, a credit rating firm. The firm earlier in the year published its preliminary forecasts (pre-COVID-19) for the Nigerian banking sector’s non-performing loans (NPL) ratio for the 2020 financial year. The agency had projected 9.4% based on its expectations that major impaired loans would be written off, there would be growth in the loan portfolio and that the IFRS 9 impact would be moderated.

With the advent of COVID-19 and associated risks, Augusto increased its projection to 13% in the short term. In an industry report issued by Augusto & Co. Limited and seen by Nairametrics, it stated,

“We have revised our NPL ratio expectations to 13% in the short term. Our revised forecast is a moderated revision of CBN’s 2016 stress test on the impact of the lower oil prices on the banking industry’s loan book. Our forecast assumes that with crude oil prices averaging $30-$35 per barrel, a proportion of the oil and gas loan book will be impaired. We also expect a rise in impairment levels in other sectors.

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“However, our prognosis may be somewhat moderated by the forbearances granted by the Central Bank of Nigeria (CBN) to banks to cushion the impact of the pandemic on the Industry’s performance. These forbearances include the allowance for restructurings of loans to businesses and individuals highly impacted by the pandemic, such as hospitality, manufacturing, and oil and gas firms, to reflect challenges in the sectors.

“In addition, the banking industry tightened credit risk management following the 2016 recession, shifting to short-dated, cash-backed trade transactions that self-liquidate and converting some unhedged FCY loans to naira loans for instance. Notwithstanding, we recognise that some banks are still in the process of cleaning up the loan portfolio from the last recession.”

(READ MORE: Why shareholders of Nigerian banks should expect lesser dividend payouts in 2020)

The report added that the capital base of the banking industry has come under pressure due to the IFRS 9 adoption and other asset quality issues that have resulted in major write-offs.

Covid-19: Impact on capitalization of Nigerian banks - Report 

 

According to the report, ”Tier II capital-raising activities like revaluation reserve, subordinated debt, and so on, increased in the 2019 financial year up until the first quarter of 2020. Due to challenges with the asset quality of banks, and the naira devaluation, we expect some strain on the Industry’s capitalization ratios in the short term.

However, this will be moderated by slower risk asset growth owing to the static business environment, increased profit retention, revaluation gains, and the use of excess qualifying tier II capital to uphold capital adequacy ratios. We also believe that CBN’s forbearance will cushion the impact of the COVID-19 pandemic on the industry’s capital base.”

It added that the banking industry will need to recapitalize in the short to medium term, noting that this will be challenging considering the current environment and weak investor sentiments. For banks that may be seeking to raise tier 1 capital, it stated that the weak valuations at this time, which has led to all the quoted banks trading at a discount to book values, maybe a deterrent.

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(READ MORE: Senate okays FG’s N850 billion loan request)

Nigerian banks had a good run on Friday as the banking index posted a 3.9% gain, one of the better performers last week. Bank shares have been battered since February and despite the gains, they are yet to claw back lost ground. The recent gains are also unlikely to incentivize banks towards raising capital from the stock market. Should there be a need to raise capital, it will have to be via tier 2 capital.

The three most valuable banks are currently trading below book values, with Guaranty Trust Bank Plc trading at 0.89x its book value, Zenith Bank Plc at half its book value and Stanbic IBTC Bank Plc at 0.97x its book value as at 20 April 2020.”

”Tier II capital will be raised to support Capital Adequacy Ratio up to the extent that it is permissible by the CBN and that market conditions are favourable. We believe that regulatory support will be required to implement rules aimed at protecting the banking industry’s profitability,” report added.

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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US government to ban WeChat and TikTok from app stores

Chinese-owned social media apps are facing a ban in the US over national security concerns.

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Reasons why a record number of people are giving up their US citizenship, US approves chloroquine as treatment for coronavirus COVID-19, Nigeria U.S. Donald Trump-oil prices

The United States government says it will ban the services of Chinese tech giants, WeChat and TikTok, from online mobile application stores in the U.S. It also plans to prohibit any funds transfer/payment services through the WeChat mobile application.

This was announced by the U.S Commerce Secretary, Wilbur Ross, in a statement on Friday, following President Donald Trump’s Executive Orders (E.O.) 13942 and E.O. 13943, on the 6th of August.

“In response to President Trump’s Executive Orders signed August 6, 2020, the Department of Commerce (Commerce) today announced prohibitions on transactions relating to mobile applications (apps) WeChat and TikTok to safeguard the national security of the United States,” said Wilbur Ross.

He added that the Chinese Communist Party (CCP), has proven it has the means and the motive to use Chinese tech apps, to threaten America’s national security foreign policy, and the economy of the U.S.

He said the following transactions will be prohibited from September 20th for WeChat and November 12th for TikTok

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  • Any provision of service to distribute or maintain the WeChat or TikTok mobile applications, constituent code, or application updates, through an online mobile application store in the U.S.
  • Any provision of services through the WeChat mobile application, for the purpose of transferring funds or processing payments within the U.S.

Mr. Ross said that with the Executive Order, the US government has taken a ‘significant action’ in fighting China’s malicious personal data breach on American citizens, and also promote democratic rule-based norms, and aggressive enforcement of U.S. laws and regulations.

The U.S government announced that further prohibitive measures, relating to both companies may be announced in the future.

“Should the U.S. Government determine that WeChat’s or TikTok’s illicit behavior is being replicated by another app somehow outside the scope of these executive orders, the President has the authority to consider whether additional orders may be appropriate to address such activities.”

President Trump has given until November 12, to resolve the TikTok security concerns of the US. He added that the prohibitions may be lifted, if they are addressed.

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Companies

GMD, 2 Executive Directors buy 5 million additional units of Zenith Bank Plc shares

In three separate transactions, major stakeholders purchased 5 million units of Zenith Bank’s shares.

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Executive Director buys 2 million additional Units of Zenith Bank Plc Shares.

Zenith Bank Plc, Group Managing Director, Mr Ebenezer Onyeagwu, and two Executive Directors, Messrs. Dennis Olisa and Ahmed Umar Shuaib, have purchased an aggregate of 5 million units of additional Zenith Bank Plc shares.

This was disclosed by the bank, in a notification sent to the Nigerian Stock Exchange, and seen by Nairametrics.

According to the notification, signed by the Company’s secretary, Michael Osilama Otu, the purchase was made in the bourse, over three transactions on the 16th and 17th of September, 2020.

As part of the regulatory requirements, the disclosure must be reported to the Nigerian Stock Exchange, especially when the trade is executed by a major shareholder or director of a listed firm.

Breakdown of the deal

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According to the details of the deal verified by Nairametrics, Mr. Dennis Olisa pulled the highest deal as he purchased 2,000,000 additional units of Zenith Bank Plc’s shares at an average of N17.18 per unit, totaling N34.36 million. Mr. Ahmed Umar Shuaib also purchased 2,000,000 additional units of the Bank’s share, at an average price of N16.99 worth N33.98 million. Completing the trio was, Mr. Ebenezer Onyeagwu who purchased 1,000,000 additional units at an average of N17.05 worth N17.05 million.

This major purchase boosted the total number of trade deals (Volume) posted by the Bank in the NSE market, as the deals contributed about 11.61% of the Bank’s total deals between 16th and 17th of September, 2020.

(READ MORE: Zenith Bank rewards customers with massive giveaways in the “Zenith Beta Life” weekly promo)

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What this means

Based on the recently released H1 2020 Financial Results of Zenith Bank, Mr. Ebenezer Onyeagwu had 45,500,000 direct shares as of June 30, 2020. Mr. Ahmed Umar Shuaib had 7,577,343 direct shares, while Mr. Dennis Olisa had 7,122,316 direct shares. All these remained unchanged from their reported shares in H1 2019.

With the addition of 1,000,000 shares, Mr. Ebenezer Onyeagwu’s stake increased to 46,500,000, indicating an increase of 2.19%. Mr. Ahmed Shuaib’s shares also leaped by 26.39% to 9,577,343, while Mr. Deniss Olisa’s shares increased by 28.08% to 9,122,316 direct shares.

This deal may signify that the Bank’s insiders expect an increase in share price. It is a positive signal to outsiders, coming from top insiders who are abreast with latest information on the Bank’s prospects.

This can play a vital role in stimulating a bullish trend. Zenith Bank’s share price is currently trading at N16.70 on the NSE.

Conclusion

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Regardless of the impact of the pandemic on the income and revenue of banks, Zenith bank still remained one of the high-flying financial organizations in Nigeria. For example, the tier-1 bank’s gross earnings grew by 4.37% from N331.5 billion in H1 2019 to N346.1 billion in H1, 2020. Its Profit After Tax increased by 16.81% from N111.7 billion to N114.1 billion within the period under review. The aforementioned factors might have been the reason behind the recent bullish trend for its stock.

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Business

FG apologizes, says Self-Certification directive is not for everyone

The Federal Government has made clarifications concerning earlier announced Self-Certification Forms.

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FG apologizes, says Self-Certification directive is not for everyone, FIRS introduces stamp duty on house rent and C of O transactions

The Nigerian government has backtracked on its earlier issued guidelines on the new banking Self-Certification Forms, saying the notice does not apply to everyone.

On Thursday, the Nigerian government ordered all persons holding accounts across financial institutions and insurance firms, to complete and submit self-certification forms to their respective financial institutions.

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It stated, “This is to notify the general public that all account holders in Financial Institutions (Banks, Insurance Companies, etc.) are required to obtain, complete, and submit Self – Certification Forms to their respective Financial Institutions. Persons holding accounts in different financial institutions are required to complete & submit the form to each one of the institutions. The forms are required by the relevant financial institutions to carry out due diligence procedures, in line with the Income Tax Regulations 2019.”

However, on Friday morning, after receiving expected backlash on social media, FG attempted a clarification stating, “We apologize for the misleading tweets (now deleted) that went up yesterday, regarding the completion of self-certification forms by Reportable Persons,” and that, “the FIRS will clarify Nigerians on the objectives of the directive.”

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READ: CBN automates trading system, introduces electronic form to facilitate exports 

The FIRS earlier today made a statement, that the guidelines are only for non-residents, and people paying tax in more than one country.

READ: Tax implication of IFRS adoption in Nigeria: key issues

“The Self Certification Form is basically to be administered on Reportable persons, holding accounts in Financial institutions, that are regarded as “Reportable Financial Institutions” under the CRS. Reportable persons are often non-residents and other persons, who have residence for tax purposes in more than one jurisdiction or Country.”

“The information that indicates an account holder is a resident for tax purposes in more than one jurisdiction, is expected to be available to Financial Institutions during account opening processes, for the KYC and AML purpose.” the statement read.

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