Saturday, November 27, 2021

    It’s double whammy for Nigerian banks as virus, oil collapse add to woes

    Must read

    Virus Adds to Woes of Nigerian Banks Beset by Oil’s Collapse
    By Emele Onu

    Fallout from crashing oil prices risks surpassing that of 2014

    Some lenders may not survive the oil slump, Chapel Hill says

    Nigerian banks have more to worry about than the coronavirus: Cratering oil prices and the threat of another naira devaluation are emerging as the biggest risks to how many lenders will emerge unscathed.

    The industry has already agreed to forgo profit to support the economy as measures to contain the Covid-19 outbreak bring most businesses to a halt. Now, oil prices near $15 a barrel are drying up the largest source of foreign exchange. That’s weighing on the currency in a triple whammy for a sector the central bank is relying on to restructure loans showing signs of stress.

    Most banks have their crude risks hedged at $40-$50 a barrel, according to ARM Investment Managers in Lagos, which means provisions would need to be raised if prices remain at current low levels. A naira devaluation following the one in March could cause dollar loans to sour, which would have to be covered by naira earnings, while also adding to the cost of capital.

    Read more: Weaker Naira Looms as Nigerian Black-Market Rate Plunges

    “The risk to earnings is higher if oil prices are less than $30 per barrel over a prolonged period of time — up to six months in our opinion,” said Aderonke Akinsola, an analyst at Chapel Hill Dunham in Lagos. “We cannot rule out the possibility that some banks may not survive that.”

    The scale of the fallout could surpass that of tumbling oil prices in 2014, which triggered a naira devaluation and five quarters of economic contraction from the start of 2016.

    That led to a surge in non-performing loans that eventually contributed to the collapse of Skye Bank Plc and Diamond Bank Plc, which was bought by Access Bank Plc in 2019.

    The industry is still trying to recover from restructuring loans related to the oil and gas sector.

    The nation’s banks “remain susceptible to deteriorating credit quality due to their exposure to ailing sectors, particularly oil and gas producers,” which account for about 26% of total loans, according to the International Monetary Fund.

    “The CBN’s imposed caps on bank fees and pressure on net interest income would also limit profitability.”

    Nigerian banks are also under pressure from their regulator, which expects lenders to extend 65% of their deposits as credit. The central bank last week took 1.47 trillion naira ($3.8 billion) from the cash reserves of lenders for failing to meet that goal and a requirement to park 27.5% of their capital with it, people familiar with the matter said.

    Power Loans
    “The combined effect of low business activities, higher impairments and possible operational and fair-value losses may result in reduced profit levels and capital depletion,” KPMG Nigeria unit said in an emailed report. Banks will also see a “sharp increase in non-performing loans.”

    In order to cushion the impact of the crisis, the Abuja-based central bank is providing about 3.5 trillion naira of intervention loans for manufacturers and health-care providers at 5% interest. It also allowed banks to restructure the terms on loans.

    Besides dollar loans to the oil industry, banks also face significant foreign-currency exposure to power companies, which increases their risks in the event of a naira devaluation, according to Renaissance Capital.

    United Bank for Africa Plc had 10% exposure to the power sector as of 2019, Fidelity Bank Plc 10% and FCMB Group Plc 7%.

    Nigerian banks fall further than emerging-market lenders after oil’s plunge
    Some winners can emerge from a naira depreciation, like Guaranty Trust Bank Plc, the nation’s largest by market value, because a significant proportion of its capital is denominated in foreign currency, according to EFG-Hermes.

    Guaranty Trust Bank reported flat earnings for the first quarter through March after loan charges doubled and fees and commission income declined.

    An index of 10 of the country’s biggest banks fell 0.4% on Thursday, snapping six days of gains. The gauge is down 24% this year, compared with a decline of 14% for the 153-member all-share index.

    “At the start of the year, banks only had to face CBN’s tight regulations, which threatened margins,” said Emmanuel Adeleke, a bank analyst at ARM Securities. “Now, it is a double whammy.”

    - Advertisement -spot_img

    More articles

    - Advertisement -spot_img

    Latest article

    WP to LinkedIn Auto Publish Powered By :