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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.



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.

“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.”

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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.


(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.

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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.

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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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Economy & Politics

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.



New CBN guidelines ban MMOs, PSPs, Operators from receiving diaspora remittances

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.


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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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