Banks’ non-performing loans

By Peter Egwuatu

*Q’3 outlook still bleak Analysts

Against the backdrop of the new Loan to Deposit Ratio (LDR) as well as impact of the Coronavirus (COVID-19) on businesses, provision for bad loans in banks rose 64.4 per cent to N155.8 billion cumulatively in major banks in the first half of the year.

Estimated bad loan portfolio for top 15 banks examined by Financial Vanguard is put at N1.7 trillion within the period.

In a bid to force banks to extend more loans to support the nation’s economic growth, the Central Bank of Nigeria, CBN, had directed banks to increase their loans to businesses in the ratio of 60 per cent of their deposits in the fourth quarter of 2019. Some banks that could not comply were penalized with a lien on their funds to the tune of N500 billion.

Consequently, amidst the twin pressures, the banks increased their loan portfolio by 5.7 per cent to N18.347 trillion from N17.4 trillion recorded in the corresponding period of 2019, H1’19.

However, though this led to about 5.6 per cent increase in the banks’ revenue, the pressures brought down the industry’s profitability.

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The banks’ performance on Profit Before Tax, PBT, in H1’20 nosedived by 4.6 per cent to N662 billion from N694 billion  in HI’19, a development market operators and analysts attributed to high cost of operations and the negative effect of the lockdown of the economy caused by the COVID-19 pandemic as well as the effect of the increased loan losses.

The banks’ had recorded a combined total revenue growth of 3.7 per cent, outperforming the economy (Gross Domestic Product, GDP) which was on the negative path at -6.1 percent.

Specifically, the banks in HI’20 posted combined total revenue of N2.8 trillion as against N2.7 trillion in H1’19.

Analysts/operators comments

Commenting on the performance of banks, analyst and head of Research and Investment at Fidelity Securities Limited, FSL, an arm of Fidelity Bank Plc, Mr Victor Chiazor said: “The Nigerian economy is a banking sector-driven one, meaning that the banks will most likely continue to grow in the short to medium term once capital expenditure and the country’s financial inclusion level continues to rise.

“As more transactions go through the banks, the banks’ gross earnings is expected to rise with the banks also generating income from other line items outside of interest income. 

‘‘Looking at the banks’ half-year figures, most of the banks’ gross earnings was majorly aided by other income, FX revaluation gains and fees, and electronic charges.”

On profitability performance,  Chiazor said: “The revenue increase on the other hand did not directly reflect on the banks’ profit as the banks operating expense increased during the period for all the Tier-1 banks which further lowered their profit with exception of a few Tier-2 banks like Stanbic IBTC.”

Managing Director, APT Securities and Funds Limited, Mallam Garba Kurfi, said: “As regard to Tier-1 banks, they control more than 60 per cent of the entire banking system in Nigeria. As we witness four out of five of them paid interim dividend while the others in Tier-2 did not, except Stanbic IBTC that paid just 40 per cent of the previous year.

“The Tier-1 banks’ gross income increased because of Loans Deposit Ratio, LDR which compelled most of them to meet up with 65 per cent LDR or pay a penalty. That was what pushed most of them for a high exposure in credit, hence high gross income. 

“The Tier-2 banks were able to earn more than the previous year because they do not have excess funds that was placed on Treasury Bills, TBs, like Tier-1 banks. Therefore, they are less effected by the fall TBs rate.”

An analyst at InvestData Limited, Mr Ambrose Omordion, said: “The huge provision of N157 billion for loan loss impacted the banks’ bottom line negatively, despite the sector remaining strong and resilient in the face of ravaging pandemic, beating market expectations and give hope of dividend but a high possibility of dividend cut as a result of the provision for bad loans and economic situation.

‘‘Few banks may maintain their dividend equalisation policy, while many may cut their payout. 

‘‘This will also be extended to other sub-sectors of the market, suggesting that investors should invest wisely by targeting dividend-paying stocks with strong fundamentals.”

On the profitability of banks, Omordion stated: “There is no specific now but the improvement of the economy will support the bottom line. The recent cut in interest rate on savings account by CBN will reduce the cost of funds and boost the performance as interest expense will drop and banking public will have access to cheaper fund.

“At the same time the government will equally borrow at a low rate. The fear now is that government’s mismatched policies like the hike in electricity bill and pump price of fuel will prolong expected recovery.

‘‘CBN is expected to make sure that banks are robust enough to withstand these headwinds and play its role as the engine room of economic development to drive recovery.”

Q3’20 outlook is bleak

On the projection for the third quarter (Q3’20), Chiazor said: The banks performance for Q3’20 is expected to follow the same pattern as operating cost has significantly increased and the only way to drive profits higher is to grow earnings faster than its expense line but given the current economic headwinds we may not see that happen in the interim.

‘‘The CBN has also continued to support the banks by allowing them consider temporary and time-limited restructuring of the tenor and loan terms of businesses and households whose earnings have been affected by the pandemic. 

‘‘We expect this forbearance to continue a little longer until there are signs of visible stability in economic activities to avoid a further rise in the banks’ Non performing loans and a rise in impairment charge for the banks as reported in its Q2’20 earnings.”

On his part, Kurfi stated: “The economy gradually opening up will need more of banking finance. This will increase the banks’ earnings. Also the recent CBN policy to pay 1.25 percent for savings deposit means cheaper funds to the banks.

‘‘The policies can improve the performance of the banks especially if the CBN improves the interest rate of Treasury Bills and keep issuing other policies that reduce the cost of funds.’’

Banks performance

Nigeria’s top five banks (Tier-1 banks) which include First Bank, UBA, GTBank, Access Bank and Zenith Bank maintained their leading position as they outperformed the seven Tier-2 banks (Ecobank, Union Bank, FCMB, Fidelity Bank, Wema Bank, Stanbic IBTC and Unity Bank) in both revenue and profitability.

Specifically, Tier-1 banks recorded a combined revenue of N1.6 trillion in H1’20 as against N1.5 billion in H1’19 representing a growth of 6.7 per cent, while Tier-2 banks posted N1.09 trillion from N1.08 trillion, representing an increase of 0.9 percent.

However, on PBT, Tier-1 banks recorded N396.8 billion in H1’20 as against N406.9 billion indicating a decline of 2.5 percent, while Tier-2 banks posted N212.6 billion as against N242.3 billion in H1’19 representing a decline of 12.3 percent.

Furthermore, the Tier-1 banks recorded decline in their Return on Asset (ROA) with an aggregate ROA value of 1.05 per cent lower than the H1’19 value at 1.27 per cent, indicating that the banks’ total assets were less proficient in the period under review.

Analysis of banks’ loans to customers

Data obtained by Financial Vanguard from banks’ financial reports turned in to the NSE showed that Ecobank Transnational topped the chart in absolute term on loans given to customers in H1’20 with N3.334 trillion from N 3.383 trillion in December 2019.

It was followed by Access Bank with N 2.999 trillion from N2.911 trillion. Zenith Bank came third recording N 2.533 trillion, followed by UBA with N 2.186 billion from N2.061 and First Bank occupying the fifth position rewording N 1.994 trillion from N1.852 trillion.



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