•Non-performing loan risk increases
As the harsh operating environment persists, five tier-one banks’ impairment charges hit N580 billion in the first three quarters of last year. The amount is a significant increase from the N122 billion they posted in the previous year.Experts have warned that the prevailing economic downturn would trigger an increase in loan default, which will eventually shrink banks’ future profitability.
Specifically, the experts stressed the need for commercial banks to efficiently manage the size of their impairment charges and loan books, noting that the current tough operating environment would further increase the level of default in the short term.
A look at the results of tier-one banks – FBN Holdings, UBA, GTCO, Access Bank and Zenith (FUGAZ) – showed that FBN Holdings’ impairment charge stood at N82.35 billion up from N15 billion recorded in 2022 while UBA’ s impairment charge in the period hit N144.62 billion, higher than N13.59 billion posted in the corresponding period in 2022.
GTCO charges stood at N89.46 billion compared to N3.69 billion in the previous year. Access Bank and Zenith posted impairment charges of N61.85 billion and N209.99 billion respectively. The two banks posted N52.95 billion and N37.09 billion respectively in 2022.
For the nine-month operations, GTCO’s non-performing loans (NPLs) rose from N1.8 billion in 2022 to N2.2 billion in 2023 while Access Bank’s NPLs stood at N6.7 billion, up from N4.6 billion it posted in the corresponding period in 2022.
FBN Holdings NPLs also increased from N3.6 billion to N5.2 billion while Zenith Bank grew its NPL from N3.9 billion to N5.8 billion. Despite the rise in impairment charges, the NPL ratio did not rise substantially.
For instance, Zenith NPL ratio stood at 3.8 per cent while Access Bank was 2.8 per cent. GTCO NPL is currently 3.77 per cent while FBN Holdings is 4.5 per cent.
There are indications that the large loan portfolio has aided the banks in reducing the impact of rising impairment charges. Experts pointed out that the rising impairment charges are an indication that most banks would have reported a significant drop in earnings or possibly losses before tax if not for the foreign exchange (FX) revaluation gains.
Operators have warned that failure on the side of the banks to create quality loan assets to help manage their loan exposure would impact negatively on shareholders’ funds of many banks and trigger panic in the system.
Banks with NPL ratios above 10 per cent are not permitted to pay dividends to shareholders, according to the CBN. Hence, it is in the interest of the economy, the regulators and the shareholders that the NPL ratio does not exceed the regulatory benchmark.
The global rating agency, Fitch Rating has said that a change in FX management stance “creates short-term macroeconomic risks, such as accentuating already-high inflation that may weigh on economic growth, heightening loan quality and capital pressures already facing the banking sector”.
Fitch expects the banking sector’s impaired loans (stage 3 loans) ratio to increase at a faster pace than before the devaluation. Head of Research, FSL Securities, Victor Chiazor, said: “The reality is that banks will have to manage their loan exposure and find quality loan assets to fund so as not to erode shareholders’ funds and create panic in the system.
“Also, recall that for the banking sector, any bank with an NPL ratio above 10 percent will not be permitted to pay dividends to shareholders by the CBN. Hence, it is in the interest of the economy, the regulators and the shareholders that banks do not pile up NPL that the ratio will exceed regulatory levels.
“When impairments rise, it means banks are making provisions for bad loans. The higher it is, the more dangerous it is for the banks as it is like an expense line that erodes earnings. Hence if you don’t make enough earnings to cover for the bad loans, you will begin to make losses.”
