Business
Anxiety as recession looms: Nigeria faces $15.4bn loss, banks reverse 2020 projections
By JULIUS ALAGBE
As the impact of COVID-19 continues to be felt globally, there are indications that deposit money banks in 2020 performance would drop due to the impact of Coronavirus, sliding prices of oil and lack of income. On the back of the rising cases of coronavirus pandemic that is ravaging the economy, deposit money banks and analysts have found mutual ground to adjust forecasts for 2020.
Most experts believed that the effect of COVID-19 on the economy will be far-reaching and telling giving the situation in the international oil market which has seen prices drop to $24 per barrel, about 48 per cent below the budget benchmark of $57. Equity analysts adjustments which take negative side projected that lenders profitability would be slipped down at the range of 10% to 30% while some smaller banks may reel out negative results.
Last week, McKinsey Consulting, an international firm, released a report which indicates that Nigeria will go into a 3 per cent recession this year far worse than the 2009 and 2014 recessions at -1.6 and -1-8 per cent respectively. This comes in the hell of previous reports by Standard and Poor, S&P, a rating agency which had downgraded Nigeria from Stable to Negative, making its financial instruments junk in the international system.
Analysts expressed concern that earnings estimate misses would feature more this year, and it might take a long time for normal activities to return except solutions for COVID-19 comes and oil prices rebound. Nigeria depends on oil for its foreign exchange earnings, and the crisis in the oil market between Russia and Saudi Arabia over production output has put severe pressures on price and the revenues of the country. Reports at the weekend said that Nigeria has about 70 cargoes of undelivered oil outstanding.
While most nations are announcing stimulus packages to save their economies, Nigeria may be borrowing to survive as it is virtually broke and the Central Bank’s intervention is only a drop in the ocean. Although, the Federal Inland Revenue Service, FIRS, reported N2 trillion revenue collection this quarter it may be a flash in the pan, as the impact of the COVID-19 and oil price kick in.
BusinessHallmark gathered that banks would have to deal with multiple issues in 2020. There is an ongoing internal stress test on the back of the recent adjustment made to Naira exchange rate at Investors and Exporters window. Again, currency traders and analysts remain bearish on FX position as they are expecting naira to find its true value southward.
Big banks are undergoing serious balance sheet stress test due to the expectation for a potential devaluation of the currency. Apart from issues with FX, operators are also grappling with oil and gas assets in the face of a decline in global prices of oil. Also, these developments combined are expected to reduce economic prosperity in 2020 as government revenues sources are under threat at the moment.
Atlantic Council, a non-partisan organisation in the United States estimates revenues loss of $15.4 billion for Nigeria due to coronavirus pandemic and declining prices of oil. Dividend payment would be affected as they need to plough back retain earnings would help banks to strengthen capital adequacy ratio.
At their separate conference calls with analysts, some banks indicated that due to development in the economy, their performance may fall short of their initial guidance. Booming with optimistic that the economy would resurge in 2020, Tier-I capital banks had set ambitious targets.
Most of these targets, as they explained, were as a result of the Central Bank of Nigeria decision to re-channel credits to support the real sector.
Unfortunately, after the apex bank tough regulation, the global prices of oil began to retreat due to the inability of the OPEC+ to balance demand and supply equation among its members.
As if the declining oil price was not enough, coronavirus pandemic added salt to the wounds, thus exacerbating the situation and analysts to worry about default rate.
Speaking at earnings call with analysts recently, Mr Nnamdi Okonkwo, Managing Director and Chief Executive Officer of Fidelity Bank Plc, adjusted its projected profit metrics down by 15%. A trend like this would affect dividend payment among bulge balance sheet banks with combine total assets at N30 trillion.
Analysts said there is a probability that Tier-2 capital banks earnings would be flat in 2020, given the fact that there is already pressure in the sector due to the increase in cash reserve ratio to 27.5%. Also, loan to deposits ratio is pegged at 65% which gives operators the tiny opportunity for other alternative investment windows to support their bottom line.
Unfortunately, more of the industry’s risk assets are now in the real sector of the economy. Meanwhile, there have been expectations that Nigeria would automatically slip into recession after the pandemic. OPEC+ oil prices bucket dropped to less than $19 per barrel on Thursday while Nigeria’s produce a barrel at around $17.
This leaves the economy with marginal spreads not enough to finance government activities at the same time when foreign investment inflow hits bottom.
Experts at LSintelligence Associates said the current situation has exposed the wrong economic structure that the nation has adopted and refused to reposition.
“There have been two major key players in the economy. First, the government has been major spenders followed closely by the Banks. Banks have some N40 to N50 trillion in assets and their safety is important to the future of the economy.
“It is unlike the government would be able to spend in 2020. That means the performance of the economy is largely in the hands of these banks”, the firm stated in an email.
However, experts recognised that the pressure on the economy would have been aggravated if the Central Bank of Nigeria earlier initiative to push credit into the real sector was a day late. Also, the government decided to stop importation has been largely positive, plus an initial ban on the 41-items by the apex bank to access foreign exchange.
Analysts said top banks like GTB, Zenith, Access, UBA and FBN have high exposure to oil and gas industry. Due to the concentration of the high loan in this segment, and the fact that the industry is facing massive prices reduction, operators’ loans may not perform.
Average non-performing loans in the banking sector may shoot up as high as 500 basis points, Wall Street analysts had stated, due to pressure from oil and gas clients’ accounts.
It is also observed that the apex bank stretch on banks in the second half of 2019 has had some impact where banks overplayed their activities; though, many banks maintained at their earnings calls with analysts the need not to be reckless with credit creations.
FBNH said its appetite would guide its desire to raise loans as a proportion of deposits; Zenith towed the same line, saying the metrics do not call for reckless. Despite weak economic performance in 2019, top lenders bolstered earnings performance with combine profit before tax settling at ₦775.28 billion. At an average growth rate of 7%, lenders bolstered the bloc’s profitability of the bank on increased credit creation in the real sector.
For the period, Zenith, ACCESS, Guaranty Trust Bank, FBNH and United Bank for Africa combined weight influenced the banking sector profit-sharing formula. Analysis of the banks’ performance showed that Zenith led the pack with profit before tax valued at ₦243.294 billion. However, from this, the leading financial boutique is expected to settle its tax liabilities ₦34.451 billion. Its total asset for the financial year 2019 was ₦6.346 billion as lender guided to grow loan book by 2% in 2020.
The lender was followed by GTBank that made ₦231.707 billion in 2019 as pre-tax profit. However, tax claim on the book of the industry cost leader was calculated at ₦34.842 billion. The carrying value of the bank closed the period at ₦3.758 trillion as management stated intention to adopt the holding structure for diversification of interests.
Access Bank Plc ranked after GTBank for-profit scorecard with a pre-tax level that settled at ₦115.379 billion. Compare to the corresponding year in 2018, the bank profit expanded by 11.814%. The largest bank by total assets tax liabilities for the period was ₦17.9 billion. This pushed down profit for the year to ₦94.981 billion.
Access Bank total assets had a carrying value of ₦7.146 trillion at the end of the financial year 2019. The management has however stated intention to increase footprint across Africa in 2020.
United Bank for Africa’s pre-tax profit for the financial year 2019 settled at ₦111.287 billion. This translates to 4.234% growth year on year. In 2018, the bank pre-tax profit was ₦106.766 billion. Meanwhile, the lender’s tax liabilities for 2019 were valued at ₦22.198 billion. Its total assets pitched at ₦5.604 trillion.
The oldest financial service bank’s profit for the year rested at ₦89.089 billion compare to ₦78.607 billion in the comparable year in 2018. In its unaudited financial statement, First Bank of Nigeria Holdings did ₦73.613 billion pre-tax profit in 2019.
This is considered a great leap for the oldest financial mall in Nigeria given the recent balance sheet repairs and restructuring exercise. Analysts said that FBNH has improved greatly, as its profit spike by about 13% year on year when compare with ₦65.265 billion reported in 2018.
