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Published On: Sun, Jul 22nd, 2018

Top banks battle rising NPLs; 2 lose top rating


In the face of daunting economic challenges, commercial lending institutions called Systemically Important Banks  (SIBs) continue to lead the Nigerian financial services sector despite their struggles with high non-performing loans (NPLs) and shrinking operating margins.

The Central Bank of Nigeria (CBN) in September 2014, issued a framework for SIBs, which was scheduled to become operational in March 2015.

First Bank of Nigeria Limited, Guaranty Trust Bank Plc (GTBank), Zenith Bank Plc, United Bank for Africa Plc (UBA), Access Bank Plc, Skye Bank Plc, Ecobank Nigeria and Diamond Bank Plc were designated as SIBs based on their impact on the Nigerian financial sector.

All the banks the CBN tagged “Too big to fail” have continued to meet the criteria for listing as SIBs, which include the size of their total assets, branch network, capital adequacy ratio (CaR), liquidity ratio, NPLs and so on. Only Skye Bank Plc appears to have failed the majority of regulatory benchmarks, forcing the CBN bank to axe its board and management.

Although the CBN did not officially announced that Skye Bank has been dropped from the SIB log, pundits believe the bank which has failed to publish its financial statements since September 2015, can no longer be considered as “too big to fail”. In 2014, Skye Bank was the fourth largest commercial lender in the country with 469 branches across the country.

While SIBs still account for over 70 per cent of total assets of the country’s banking industry, the total assets of Diamond Bank has shrunk in the last three years. It has dropped -61.92 per cent from N4.34 trillion at the end of 2014 to N1.65 trillion in March 2018, mainly as a result of the adverse impact of falling asset quality and the sell off of its West African operations.

“I am not sure the CBN has changed the conditions (for SIBs). But some banks may have fallen off the wagon on account of the development in the market,” posited Ayodele Akinwunwu, Head, Research, FSDH Merchant Bank.

High non-performing loans have plagued Nigerian banking industry after the country plunged in 16 months recession, which it eventually exited in first half of 2017. But the banks have not recovered fully from the aftermath of the shock as the SIBs continue to struggle with high NPLs. Most banks in the country have overshot the 5 per cent NPL ratio threshold, with the industry average NPL ratio currently standing 13 per cent.

With the worsening of non-performing loans, some banks are no more in the SIBs list, said Moses Ojo, Head, Business Development and Research, PanAfrican Capital Plc.  “A lot of the SIBs are responsible for the large chunk of the NPLs in the industry.”

FirstBank with a NPL ratio of 2.9 per cent in 2014 now has the industry’s highest NPL ratio of 22.8 per cent at the end of 2017 due to its high exposure to the oil and gas and energy sectors. The bank has made significant efforts at trimming down its toxic assets, having reduced its risk appetite substantially.

Diamond Bank has been having issues with its NPL, even before the classification of SIBs. Its NPL ratio stood at 5.1 per cent in 2014 and has worsened to 15.7 per cent in March 2018.

One of the factors considered in classifying SIBs was their branch network. But in the last three years, a lot of banks have rationalized their branches to cope with challenge of operating costs.

Nigerian oldest lender, FirstBank in 2016 shut down some of its branches it tagged as performing below expectation. Similarly, Access Bank shut 130 of its branches and even Standard Chartered Bank, which has only 42 branches in Nigeria closed down some of its branches. Ecobank also merged 74 of its branches as Diamond Bank even went ahead to sell its West African operations recently.

But despite this, Kunle Ezun of Ecobank believes all SIBs were still doing well as their balance sheet size very big.

The apex bank planned to implementation of 16 per cent minimum CaR for SIBs in July 2016, but put it forward infinitely due to challenge in boosting capitalisation levels, especially with the recession the country was grappling with at the time.  SIBs currently have 15 per cent CaR benchmark.

Diamond Bank capital adequacy ratio has dipped to 16.4 per cent at the end of March 2018, from 18.4 per cent in December 2014. The bank’s high NPL in the oil and gas and power and energy sector was largely responsible for the drop in its CaR. But other SIBs have continued to improve their CaR.

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