The last has definitely not been heard of the economic impact of COVID-19, despite the seeming normalcy that is beginning to return to the economy post lockdown. The Nigerian banking industry, which has consistently been the most profitable single sector traded on the NSE and accounts for over 50% of investors’ stock traded daily, may be set for hard times ahead notwithstanding their 2020 Q1 profits and their best efforts to adapt to the new normal.
From the shutting down of the economy for months to the closing of borders and business offices of banks, here are the 3 major ways in which COVID-19 will affect the 2020 profits of Nigeria’s Lenders:
Increase in impairment and bad loans
Impairments are an additional financial cost to the lender resulting from the reduction in the creditworthiness of the borrower while bad loans are literally loans that have gone… Bad (you guessed that). Whereas bad loans are to be written off completely by the lender, impairments are deductions that should reflect in financials of the lender pending when the loans become active.
In the wake of the pandemic, the CBN took proactive measures to ensure that Banks are protected from ruinous impairments by approving the request of the Lenders to restructure loans in their books allowing more time for debtors to pay.
Notwithstanding this initiative, loans (especially in the retail space) would most likely end up being written off as unemployment rates soar and the economy slowly recovers from the effects of the pandemic. Education, aviation, and the oil and gas sector do not seem on the path of recovery yet, and their delay would most likely cost lenders with sizable exposures in their respective industries.
FX scarcity and Liquidity squeeze
These two sides of the same coin are causing painful gut-wrenching groans to be heard in the Banking sector, especially amongst lower-tiered Banks.
The oil price crash coupled with border closures have worsened Nigeria’s FX deficit and caused the CBN to employ unconventional means and policies to stabilize the Naira, even after a long-awaited devaluation.
Banks who are unable to meet the FX needs of their customers rush “cap in hand” to the CBN to get FX intervention for their corporate customers for whom the exorbitant parallel market rate is not an option. Instead of getting their requests met, their positions are debited and added to their CRR forcing them to reduce their FX demands and leave their customers dissatisfied. While this may lead to loss of deposit from these customers taking their businesses elsewhere, the major issue the Banks have with this discretionary CRR, is the foregone earnings that their extra CRR would have earned in the money market or through commercial loans.
Over N2trillion has been arbitrarily debited from Nigerian lenders since April in tranches of N1.4trillion, N300billion and N459.7billion causing some banks to have CRR in excess of the 27.5% agreed upon by the CBN Monetary Policy Committee in January 0f 2020.
The depreciating Naira is also inimical to Banks with FX denominated bonds, and is expected to impact their bottom line.
The macro economy and unfair competition
The relationship between Banks and the economy is complex. They are the gauge through which the pulse of the economy is felt, and the channel through which its life force can be restored. At no time is this complex relationship more evident than during severe economic strain, such as this pandemic. It is at this time that the Banks experience unfair competition from their regulators who are forced to provide direct, and cheaper funding to the economy sacrificing short term profitability of the Banks for long term sustainability of the economy.
In the wake of the pandemic, the CBN has provided series of intervention funds, ranging from the N50b household support, to the Agric fund, CIFI and MSME support funds at single interest rates, lower than the commercial Banks can afford.
Although the commercial Banks are listed as PFI (Performing Financial Institutions) for most of these funds, the commissions they stand to earn are in no way comparable to what it would have been had they been the direct lenders at commercial rates. This arrangement would definitely impact their creation of new risk assets and the accompanying income that would have found its way to their annual profit.
It’s not all gloom though, Bankers who chose to speak off-record claimed that the lockdown played a key role in increasing enrolments on their online platforms and the timing of the nationwide cashless policy was a “masterstroke” in ensuring that customers bought into e-channel transactions on which the Banks would earn fees and commissions. They claim that the pandemic also offered some Banks a rare opportunity to prune their operations cost without alarming their customers, as they were able to shut down not too profitable branches in some locations and redeploy their staff accordingly.
A top Treasury official in one of the new generations Banks who sought anonymity said that Banks who have earned income in FX prior to the pandemic would enjoy revaluation profit, but was quick to add that this little margin would not offset their loss of income from Letters of credit not done due to border closures, nor will it write off the rate decline in risk-free investments of Banks buying Government Bonds.
With increased cost for operational branches due to adaptability to COVID-19 protocols amongst other things, it remains to be seen how Nigerian Banks would fare in this remarkable year. Their H1 results should give more insight.