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Zenith Bank see most lenders upstream borrowers hedge matured in 2021 and more expensive if oil remains depressed

2020 has been a very challenging and I guess I should say unprecedented year as we continue to deal with the health, financial and economic impacts of the Covid-19 pandemic,” UK Eke, then group managing director at First Bank of Nigeria, told investors on an analyst call on August 3, describing the “monumental contraction” in economies across the world. 

But Still, the FirstBank, which is Nigeria’s third-largest lender by assets, grew pre-tax profits by 56 per cent in the first half of the year, as a modest increase in loan losses was more than outstripped by a surge in interest revenues, largely from treasury activities, which benefited from volatile markets.

While other Nigerian banks reported a similar trend. Rating agency Fitch warned in April that Nigerian banks were at “severe risk” from the oil price slump and the pandemic.

Mr Ghadia says banks’ “significant exposure” to the oil and gas sector was so far proving “more resilient than most other parts of the (loan) book”.

After that crash, he says banks insisted upstream borrowers, a category that includes the companies who search and drill for oil, had hedges in place to protect them from falling oil prices.

The hedges, which take the form of derivatives contracts and allow the companies to lock in a guaranteed oil price by paying a fee, now reduce the chance of banks having to take provisions for losses on those loans. 

Still, Taiye Ayandibu, head of investor relations at Nigeria’s largest lender Zenith Bank, said his institution was “concerned” about oil and gas loans even though 90 per cent of their upstream borrowers have hedges in place.

“Most of the hedges will mature towards the end of this year into early next year and if prices remain depressed, it will become more expensive to buy new hedges,” he said. 

Mr Ayandibu is more optimistic about his bank’s overall loan book, particularly the loans which have been restructured through the pandemic. In March, the central bank gave lenders permission to offer temporary easings to borrowers affected, without forcing them to take provisions or classifying the loans as non-performing. 

 “Most of the restructurings were done due temporary cash flow issues while the assets are still good and producing,” Mr Ayandibu says, adding that he did not expect them to become non-performing. 

Data from Nigeria’s central bank show 41 per cent of loans were classed as restructured by June 20. 

This month, rating agencies turned more positive on the sector. Fitch has recently taken a clutch of Nigerian banks, including Guaranty Trust Bank, Zenith and United Bank of Nigeria, off its watch list for a possible downgrade.

In its note on Guaranty, Fitch said pressures on the bank’s loan books had “significantly eased” since March when it was put on ratings watch negative.

The improvement stemmed from developments around restructured loans and because of the banks “own debt relief measures”, Fitch says.

In the long term, Mr Ayandibu says there is a “massive” opportunity for his bank and others to grow their business by tapping the population of adults in Nigeria without bank accounts.

“In the last few years, we have grown our customer base astronomically through our retail drive; from 7.8m in December 2018 to 11m in June 2020,” he says.

Naija247news, Nigeria
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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