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.”
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.
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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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.