The Nigerian banking industry witnessed a 14% rise in Non-Performing Loans (NPLs) in the first half of 2020 ending a 2-year trend of continued decline in NPLs, since Q3 2018.
According to the latest banking sector report released by the National Bureau of Statistics (NBS), non-performing loans in Nigerian banks increased to N1.212 trillion at the end of June 2020, from N1.059 trillion recorded in December 2019, indicating that NPLs across Nigerian banks rose by N152.4 billion or 14.38% in six months.
Oil & Gas sector, Construction, others lead the pack
A cursory look at the report reveals that the number of loan defaulters may have started to rise across Nigerian banks.
- At the end of H1 2020, Oil and Gas sector contributed the largest share to NPLs in Nigerian banks, recording a significant 22.2% increase in NPLs from N219.91 billion recorded at the end of Q4 2019 to N268.79 billion in Q2 2020.
- Construction recorded a 93.4% increase, from N86.79 billion in Q2 2019 to N167.86 billion in Q2 2020.
- One of the biggest contributors to NPLs in Nigerian banks was Commerce and Trade as it recorded a significant 17.5% rise from N146 billion to N171.55 billion at the end of Q2 2020.
- Meanwhile, despite the rise in NPLs across critical sectors, some sectors including agriculture, transportation, power & energy, and education recorded a decline.
Why the rising trend?
The recent upward trend in Non-Performing Loans is mostly attributed to non-payment of loans by bank obligors due to the covid-19 induced lockdowns. Nigerian banks have also seen their asset quality decline due to the fall in oil prices.
Earlier in the year banks cut a deal with the CBN as they were granted regulatory forbearance in the restructuring of loans. Over 33% of industry loans are expected to be restructured as part of the deals signaling the spate of economic crunch that has hit the private sector.
A recent Meristem report seen by Nairametrics forecasts further deterioration of asset quality.
A further deterioration in asset quality is likely to occur, particularly for vulnerable sectors like Oil and Gas, Manufacturing and Agriculture. This may however be mitigated by the planned restructuring of33% of industry loans.” The report highlights.
Despite the headwinds expected, the CBN appears satisfied with the level of non-performing loan ratios as highlighted in its July monetary policy communique.
“The Committee noted the decrease in NPLs ratio to 6.4 percent at end-June 2020 from 9.4 percent in the corresponding period of 2019, on account of increased recoveries, write-offs and disposals. The Committee expressed confidence in the stability of the banking system and urged the Bank to monitor the compliance of DMBs to its prudential and regulatory measures to sustain the soundness and safety of the banking industry.” CBN
At N1.2 trillion Nigeria’s non-performing loans are still relatively low compared to previous years. However, there is concern that this may not be the true reflection of bad loans in the country considering the imminent recession and level economic crunch in the country.
Against the backdrop, pressure may start building on the banks, whose loan books have been hit by Nigeria’s shrinking economy, plunging currency, and foreign exchange shortages, following the slump in oil prices.
Projections by EFG Hermes, reveal that as a result of the current economic challenges, as well as what it calls ‘CBN’s erratic and unorthodox policies over the past five years’, banks are expected to write off around 12.3% of their loan books in constant currency terms between 2020 and 2022, the highest of all the previous NPL crisis faced by financial institutions within the nation.
Download the Nairametrics News App
Leaked Bank memo spooks holders of domiciliary (dollar) accounts
A memo purportedly sent to the foreign exchange trading desk of a leading commercial Bank has spooked domiciliary account holders.
A memo purportedly sent to the foreign exchange trading desk of a leading commercial Bank has spooked domiciliary account holders (depositors who keep money in dollars) in banks.
In the memo seen by Nairametrics, the bank mentioned that ” it has become necessary to review the utilization of inflows into customers DOM accounts”. Nairametrics cannot verify the authenticity of the memo. However, it has been widely shared on some social media platforms and was the subject of debate on Twitter.
Explore the Nairametrics Research Website for Economic and Financial Data
In the purported letter, the bank recommended utilization actions for a different type of inflows such as inflows from non-oil and oil proceeds, offshore FX inflows, forex inflows from other Nigerian banks, and inflows from “Internal account to account FX transfers (sourced from offshore inflows)” and Internal account to account FX transfers (sourced from FX cash deposits) FX cash lodgment over the counter.
What seems to have spooked some Nigerians were the recommendations made in the memo. For example, under the category that addressed Offshore FX Inflows Local FX inflows (from other Nigerian banks), Internal account to account FX transfers (sourced from offshore inflows), it recommended that “Transfers to third parties are strictly prohibited”. This suggests inflows from abroad into your local account in Nigeria cannot be transferred to anyone else except you sell to the bank or transfer to yourself.
In another type of FX transfers, Internal account to account FX transfers (sourced from FX cash deposits) FX cash lodgment over the counter, it made the following recommendations.
- The origin and source of the FX deposit should be determined before customer can be credited to ascertain legitimacy
- FX cash lodgments should be lodged by only account holders and they can have unfettered access by telegraphic transfer up to a limit of $40,000.00 monthly for payment of medical bills, school fees, subscription to professional bodies, etc., subject to existing CBN guidelines
- Transfer from one customer to another is prohibited
- Transfer within related companies is allowed subject to a limit of $50,000.00 per month.
- Own use for eligible transfers and in cases as deemed by regulators (savings towards investments, etc.). This should be subject to regulatory limits and backed by signed instructions.
- Cash drawings.
It is unclear if these directives have the backing of the CBN as the origin or the source of the letter cannot be verified at the time of writing this article.
What this means: In recent days we have seen several internal leaks from banks recommending several measures aimed at curbing access to foreign exchange. For example, a text message purportedly shared by a bank and seen by Nairametrics for example stipulates that “customers can no longer effect FX transfers directly to third parties” explaining that customers can only “sell such funds to the banks”.
- The CBN is yet to comment on any of these memos and as far as we know has not issued any circular publicly to this effect.
- If this memo is true, then it suggests other banks are seriously considering capital controls that limit FX speculations in the hope that it will extinguish dollar demands.
Note: There is a lot of fake information out there however, Nairametrics shares information that it believes its readers should know about even if we cannot immediately authenticate its reliability.
CBN gives up on its policy of attracting dollars
CBN has given up its policy of attracting ‘hot money’ as it selects an alternative way to fight inflation.
The Central Bank of Nigeria (CBN) issued a monetary policy communique explaining why it cut its monetary policy rate from 12.5% to 11.5%, the first drop since May 2020 when it slashed MPR from 13.5% t0 12.5%. The cut in rates means it is no longer targeting foreign investor inflow as a basis for keeping the exchange rate stable.
The CBN has held MPR high for years due to high inflationary pressures believing that higher MPRs could lead to a lower inflation rate. However, the Covid-19 pandemic and the increased price of fuel and electricity suggest this is a battle already lost via hawkish monetary policy.
Explore the Nairametrics Research Website for Economic and Financial Data
What they are saying: According to the bank, it believes the higher inflation Nigeria is facing is not due to monetary policy but due to “causal factors” which are outside of its immediate control.
“In the view of the MPC, so far, evidence has not supported the rising inflation to monetary factors but rather, evidence suggests nonmonetary factors (structural factors) as the overwhelming reasons accounting for the inflationary pressure,” the CBN stated.
The structural factors the CBN is referring to are rising in prices of fuel and electricity as well as cost increases emanating from the devaluation of the naira.
“Accordingly, the implication is that traditional monetary policy instruments are not helpful in addressing the type of inflationary pressure we are currently confronted with,” the CBN added.
These issues mean the CBN faces a quagmire in how to combat inflation as the traditional measures it has typically deployed might not work effectively.
Forgo hot money: The apex bank toyed with increased MPR to combat the high inflation rate but opined that doing so could lead to an even deeper recession despite the benefits of attracting foreign capital.
“The Committee noted that the likely action aimed to addressing the rise in domestic prices would have been to tighten the stance of policy, as this will not only moderate the upward pressure on prices but will also attract fresh capital into the economy and improve the level of the external reserves. It however, noted that this decision may stifle the recovery of output growth and thus, drive the economy further into contraction.”
In 2017, the CBN adopted a hawkish monetary policy stand of increasing MPR and offering interest rates as high as 18% via its open market operations bills.
- The policy helped attracted billions of dollars in capital rising to as high as $13.4 billion in 2019. It dropped to as low as $332 million in the second quarter of 2020.
- Foreign investors have basically stopped inflowing forex into the control as yields have crashed and repatriating it is now a major challenge.
The other option: Deciding against increasing MPR means the CBN had to consider a dovish policy, which requires that they cut monetary policy rates and intervene in sectors of the economy that can address the supply side factors it cited. Supply-side factors are price-related increases emanating from high production, storage, and distribution cost of finished goods and services meaning that price will remain high despite stable or lower demand.
“On easing the stance of policy, the MPC was of the view that this action would provide cheaper credit to improve aggregate demand, stimulate production, reduce unemployment, and support the recovery of output growth. Members were of the opinion that the option to lose will complement the Bank’s commitment to sustain the trajectory of the economic recovery and reduce the negative impact of COVID-19. In addition, the liquidity injections are expected to stimulate credit expansion to the critically impacted sectors of the economy and offer an impetus for output growth and economic recovery,” the CBN stated.
What this means: By dumping inflation targeting from the demand side, the CBN is betting that spending money on stimulus programs will pay off down the road as cheaper long term credit will reduce cost of goods and services and will eventually reflect in the lower inflation rate.
- The CBN did not state where it sees the inflation rate and when it will drop to its new target by relying on supply-side management as strategy.
- The downside of this strategy is that there is very little impetus for foreign investors to purchase CBN securities at very low-interest rates.
- This shuts the door to the reliance of foreign portfolio inflows to shore up dollar reserves leaving us with investors who may want to return to the stock market.
- If oil prices fail to pick up and foreign investor inflow is not forthcoming, then there will likely be heavy pressure on the CBN effectively worsening things.
COVID-19 forces tenants to request moratoriums from property owners
Tenants demanding moratorium from landlords because of the effects of COVID-19.
The effect of the Coronavirus pandemic is telling on the Real Estate sector, as many occupants have requested moratoriums from property owners or managers.
In separate interviews, some tenants told Nairametrics that they could no longer afford their rents, hence the need for moratoriums. If denied, a lot of them are ready to move to border towns of Lagos.
A moratorium is a legal authorization to debtors to postpone payment. The document can be obtained by tenants, to prevent the managers or owners of properties from taking legal actions against them.
A banker and resident of Oduduwa Crescent, Ikeja GRA, who simply identified himself as Kola, said that his landlord had informed him of a planned 25% increment in his rent from April 2020, a month before his rent was due, which he had agreed to.
Unfortunately, in May 2020, his employer (one of the Tier-1 banks) gave him the option of either accepting a 25% pay cut in May or resigning. Considering the fact that he had no side hustle, Kola chose the ‘lesser evil.’
“I took the decision because it pays me to allow a pay cut, than being out of job. At that point, I considered requesting a moratorium, as I have never owed rents before. I could afford to pay the rent, but I didn’t know how long I will be without a job, and paying the rent from my savings was not a wise decision for me. As Expected, the property owner was not comfortable with my request, as he suggested that I relocate to a cheaper facility.”
In his own case, Richard, who was a manager in one of the hotels close to the Lekki toll gate, was not as lucky as Kola. His rent was due by May, the same month his employer asked him to stay at home till further notice.
Efforts to plead with his landlord to buy more time fell on deaf ears, as the owner of his Surulere apartment was bent on collecting the rent.
He said, “I had no choice but to plead for three months to secure another apartment when it became obvious that my employer would not recall us anytime soon. Eventually, I decided to move from Surulere to Magboro where rents are cheaper, and property owners may be reasonable unlike their counterparts in Lagos.”
Kola and Richard are only two among hundreds of breadwinners that lost their sources of income or had pay cuts, especially during the lockdown. A lot of them, whose rents were due between April and July, are currently looking for cheaper residences amidst pressure from their landlords.
No doubt, apartments are cheaper in some border towns of Lagos. Some of the areas are Akute, OPIC (Wawa), Arepo, and Magboro, all in Ogun State.
For instance, while a self-contain apartment is obtainable between N120,000 to N150,000, a 2-bedroom flat goes between N250,000 to N300,000 per annum, and a 3-bedroom flat is rented between N350,000 to N400,000. In the city centre, such as Ikeja, Gbagada, and Surulere or on the Island, the rents are astronomical.
The heat will be more
A Real Estate practitioner and also the Vice President, Lagos Chamber of Commerce and Industry (LCCI), Gbenga Ismail, explained that the impact of COVID-19 in real estate would be felt later, because of the tenancy/rent structure of the sector.
Unlike what is obtainable in other climes like the United Kingdom (UK) and the United States of America, where rents are renewed on a monthly or quarterly basis, Nigeria may not feel the pressure now, as rents are paid in one or two years’ advance.
Ismail, in an interview with Channels TV, said, “Most people that either lost their jobs, or had their salaries slashed, are likely to have paid their rents in advance before the virus, and that could still ease the tension for now, at least till the end of the year. Right now, what happened is that, by the lockdown period, you won’t feel anything; but by the third or fourth quarter of the year, you start feeling it; only then, would we see how it has affected Nigeria. By then, people won’t be able to pay rents or buy houses as planned. We are not sure of where the monetary issues are going now, and if lending will continue into the real estate sector. We are yet to see some of these things going on. Even in inventories, where developers have put houses out for rent, the concern is who is going to rent them? Before COVID-19, we wait 6 months before houses get rented or leased, but now it may not be less than 12 months. The immediate impact would soon start to reveal itself.”
More plead for a moratorium
Ismail added that more tenants would likely plead for moratoriums, because their businesses may have been affected, and some might have lost their jobs.
“Those who have mortgages and are possibly in the risk areas of losing their jobs will definitely have discussions with their lenders if that happens. I think the mortgage firms have to listen and think of how to help them since the COVID situation is a force majeure – unexpected circumstance. People are being forced to make decisions they did not plan to make,” he added.
Explore the Nairametrics Research Website for Economic and Financial Data
In all, the experts urged all stakeholders not to panic, as the phase will definitely pass, and the economy will gradually recover.