Fitch affirms Nigerian banks’ profitability

Warns against impact of rising NPLs
Fitch Ratings has affirmed that Nigerian banks remain profitable despite the challenging macroeconomic environment and the consequent rise in their debtors’ inability to honour their loan obligations.

The report, which serves as a tonic for the sector operators’ survival bid, noted that the major sources of the current profitability were wide margins and currency revaluation gains, which were also large in some cases.

According to the rating agency, although the gains were one-off, they have been realised and provide a strong boost to their capital, which is positive, especially in light of weak asset quality.

“The quality of management at Nigeria’s leading banks is solid. Our discussions with management highlight that continued steps will be taken to strengthen capital and address loan-quality issues during first quarter of 2017,” the agency noted.

Meanwhile, it has also warned that the reported level of Non-Performing Loans (NPLs) ratio does not tell the whole asset quality story, as there are always more about it.

Noting that restructuring of loans is fairly a common practice in Nigeria, with particular reference to the one extended to the troubled upstream oil sector by banks and estimated at 20 per cent of total loans in some lenders’ books, the agency warned of further defaults.

“Not all restructured loans will go bad, but in our opinion the portfolios are higher risk, suggesting that capital buffers at banks may be weaker than reported ratios suggest. The oil and gas sector accounts for 30 per cent of total banking sector credit in Nigeria,” it added.

The Managing Director of First registrar, Bayo Olugbemi, reiterated that banks are in business to lend money, hence the problem should not be credit volume, but the level performance.

Analysts at Afrinvest Securities Limited, in a note to The Guardian at the weekend, also affirmed that the troubled macroeconomic landscape in 2016, weighed heavily on households, government and investment spending as well as operating and financing cost.

For the corporates, the environment has remained tight, even till date, as reflected in the performance of macroeconomic indicators like Gross Domestic product, foreign exchange and inflation.

“In the banking sector, the key risk factor was weak asset quality, which drove NPLs and provisioning charges higher across the industry’s tiers, resulting in weaker margins and pressure on CAR positions.

“This factor was also responsible for the reluctance of banks to extend new credit facilities…Financial results so far have been broadly positive, driven by non-interest income through foreign exchange trading income, revaluation gains and improvement in E-business income.

The assessed adverse economic impact on the borrowers and their business, resulting to rising defaults, additional provisioning by banks and consequent reduction in banks’ Capital Adequacy Ratio (CAR) had been blamed on financial institution’s travails.

But the agency reiterated that in its assessment of the Nigerian banks, their respective capacity to absorb losses through capital varies considerably, with only one at the moment adjudged stronger than the rest, while capital weaknesses is worse for one of the top five lenders and a medium size counterpart.

“All Nigerian bank ratings are in the highly speculative ‘B’ range, but even so capitalisation is an important differentiator. The scores we assign, based on capitalisation and leverage metrics across the sector, are low, but vary considerably,” the agency added.

This became obvious just as the Financial Stability Report of the Central Bank of Nigeria showed that banking industry Non-Performing Loans (NPLs) moved from 11.7 per cent to 12.8 per cent at the end of 2016 to N2.1 trillion at the end of December 2016 from N1.67 trillion in June 2016.

Consequently, baseline CAR for the industry, large, medium, and small banks stood at 14.78 per cent, 15.47 per cent, 12.75 per cent and 3.14 per cent, respectively, showed a decline, although above limit, but worse for small banks.

The apex bank’s simulation also showed that a 100 per cent further increase in NPLs, will lead to damning effect on all sizes of banks, while the small banks will be closed down.