Godwin Emefiele

Deposit Money Banks in the country are in for a tougher year due to the biting effects of rising bad loans and the economic downturn, OYETUNJI ABIOYE writes

Rising bad loans due to the slow growth in the economy will drag a good number of Nigerian banks to record low profits when their financial results for the second quarter are released any time from now, findings have shown.

As a result, 13 out of the 15 banks whose shares are quoted on the Nigerian Stock Exchange may post a combine decline of 15 per cent in their second quarter financial reports, according to top bank executives familiar with the situation.

In the first quarter of 2016, 13 out of the 15 banks whose shares are quoted on the NSE posted a combined PBT of N135.36bn, compared to N148bn in the corresponding period of last year.

This represents eight per cent decline.

Similarly, the 13 banks posted profits after tax of N116.6bn in the first quarter of 2016, compared to N126.4bn in the first quarter of 2015.

The banks are: Access Bank Plc, Guaranty Trust Bank Plc, Zenith Bank Plc, United Bank for Africa Plc, Diamond Bank Plc, Ecobank Transnational Incorporated Plc, Fidelity Bank Plc, First City Monument Bank Limited, First Bank of Nigeria Limited, Union Bank of Nigeria Plc and Sterling Bank Plc.

The DMBs will start releasing their second quarter financial results at the Nigerian Stock Exchange this week. Some, however, may delay theirs for some time.

Top bank executives told our correspondent on Sunday that many of the nation's lenders would post record low profits in their second quarter financial results due to higher amounts of bad loans in their books.

A director in one of the tier-1 banks privy to the development, who spoke under the condition of anonymity, said, "The slowdown in the economy has made more companies to default in the repayment of their loans; this has increased the amount of non-performing loans in banks' books.

"The CBN regulation requires that provisions be made for these loans. The provisions have cause huge decline in banks' profits in the second quarter financial results."

According to other bank executives, while many lenders will post record low profits, at least one or two would post losses in the second quarter.

"Many banks still recorded high NPLs due to record number of defaults from their clients in the manufacturing, consumer goods, real estate, and oil and gas sectors. These dragged down their second quarter profits following the mandatory provision for bad loans," a risk manager in a tier-2 bank told our correspondent under condition of anonymity.

The economic slowdown in the country made four banks to lose about N17bn in profits in the first quarter of this year, their financial results posted on the NSE website showed.

The banks are Ecobank Transnational Incorporated, Guaranty Trust Bank Plc, Unity Bank Plc and Diamond Bank Plc.

They recorded a combined decline of N17bn in their profits before tax for the three months ended March 31, 2016, when compared with the corresponding period of 2015.

According to the 2016 first quarter unaudited financial results filed with the NSE, Ecobank, GTB, Unity Bank and Diamond Bank recorded profits before tax of N20.63bn, N30.68bn, N1.05bn and N6.04bn, respectively.

When compared with N30.52bn, N32.65bn, N4.26bn and N7.94bn recorded by the banks in the first quarter of 2015, the combined profit before tax of the four banks dropped by N17bn from N75.4bn in the first quarter of last year to N58.4bn in the same period in 2016.

In terms of their profits after tax, the four banks recorded a decline of N14bn.

Nigerian banks had posted record high profits between 2011 and 2014. This followed the establishment of the Asset Management of Corporation of Nigeria in 2010 following the banking sector crisis of the year before, which absorbed the NPLs of the lenders.

Owing to the lenders' high exposure to the oil and gas sector, the global drop in crude oil prices in 2014 caused their profits to start declining by the end of 2015.

Majority of the 15 banks listed on the NSE recorded decline in their full-year profits in the 2015 financial year. However, few ones such as Access Bank Plc, Zenith Bank Plc, United Bank for Africa Plc and GTBank outperformed the market despite sizeable volume of bad loans.

Economic and financial analysts, who are predicting lower profits in the second quarter of this year, linked the development to lower national imports due to foreign exchange challenges, lull in economic activities and slow implementation of the 2016 budget, among others.

The Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, said banks would make higher provisions for bad loans in their second quarter results due to the lull in economy, slow implementation of the budget and reduction in their income lines and profits.

He said, "Banks' income lines have reduced due to the foreign exchange challenges in the country. Many banks cannot engage in trade finance as they should have done due to scarcity of forex.

"Also, lending that should go to the Federal Government contractors could not happen due to the late passage and implementation of the budget. And more importantly, they will experience higher provisions for bad loans due to the lull in economic activities."

An analyst at Afrinvest, a Nigeria-based research and investment advisory firm, Mr. Robert Omotunde, said the banks' performance in the second quarter would be lower than that of a similar period in 2015 due to high impairment charges on the part of the DMBs.

He said, "It appears that banks (because of their resilient nature) will still manage to post profit in their H1 financial results but not as high as that of H1 2015 due to high amount of risks in the system.

"Banks are recording high impairments in recent times. This can also be traced to the high exposure of Nigerian banks to the oil and gas sector. On the average, the exposure rate is currently at 24.5 per cent for all the banks. This is quite high."

The President, Institute of Chartered Accountants of Nigeria, Mr. Titus Soetan, said banks were in for a tougher year due to the economic downturn.

He said, "I see the banking sector still facing further challenges. The chanllenges in the economy will make more loans to still go bad. Again, the banks provide infrastructure for their operations because of the poor state of infrastructure in Nigeria. All these still affect their overheads and they need to look at how to cut costs in other areas now."

He advised them to be more innovative so as to generate other sources of income.

Bad loans, naira volatility and other economic headwinds had made Ecobank, Union Bank, First City Monument Bank Limited, Wema Bank and Fidelity Bank to post a combined profit decline of N53.54bn in the 2015 financial year.

The bad loans in the banking industry rose sharply by 78.8 per cent to N649.63bn in 2015, indicating severe deterioration in the quality of the loan portfolio of the 22 banks, a CBN staff report presented to the Monetary Policy Committee had revealed.

The report indicated a general increase in the bad/non-performing loans among the 22 Deposit Money Banks in the country. This was despite the 30 per cent decline in new loans granted by the lenders in 2015 to N5.78tn.

According to the report, 18 out the 22 banks recorded increase in bad loans. Furthermore, the number of banks that exceeded the regulatory limit of five per cent for the ratio of bad loans to total loans rose from three in 2014 to eight last year, with three exceeding 10 per cent.

Download Now