Banks face steep liquidity challenges — Analysts

From all possible indications, the year 2016 will pose a lot of challenges for the financial sector, including the already anticipated liquidity crisis that often leads to systemic crisis and bank collapse.
In the recent past for example, the industry has had to face the indignity of bail outs and liquidation.
It was liquidity issues that led to the consolidation exercise in 2005 and banking reform of 2010, which resulted in the creation of AMCON. However, analysts believe that the industry is now in a similar situation and this could point to another round of crisis.
Already faced with growing risk assets, as well as capital constraints as a result of poor economic performance, analysts are projecting that deposit money banks (DMBs) would engage in cautious lending in 2016 to avoid overreaching themselves as in the past. The Central Bank of Nigeria’s (CBN) restrictive foreign exchange policy and the decline in oil prices are directly affecting banks’ revenue generation capability and dipping the sector’s profit outlook for the financial year.
Currently, some financial and investment banking experts are expressing worry over banks’ seemingly excessive exposure to power, oil and gas in their portfolio of earnings assets. This comes against the backdrop of AMCON’s declared policy not to intervene to save any bank again as it moves to wind down operation.
The bandwagon effect often associated with booms had pushed some banks to significantly increase aggregate loans and advances in financing power, oil and gas projects years back. However, reality set in on the back of plunging prices of oil while power companies are struggling with target profitability.
According to consultants in SCP Professionals LLC, there are two drivers of economic prosperity in Nigeria. Banks total lending into private sector and government expenditure determine to a greater extent the robustness of economic growth that Nigeria can achieve.
“In 2015, and perhaps up till date, both government and banks have lowered the lever, which may cause unemployment in certain segment of the economy.
While banks have curtailed their lending up to the fourth quarter in 2015, we expect an aggressive but cautious business development going forward as FG has indicated to expand the size of the economy in 2016”, the firm stated.

CardinalStone Partner noted that changing dynamics in petroleum and power sector will push up banks non-performing loans and consequently loan loss provision in 2015. The investment banking firm in a report based on decision of the current administration to eliminate the inefficiencies in the current fuel subsidy regime by either removing subsidies or plugging the sources of the leaks.
“We therefore expect a deterioration in the percentage and quality of loans to the O&G sector of the economy and a consequent increase in NPLs and provisioning in the second half of 2015. With an average 26.6% of gross loans to the upstream and midstream sectors of the economy as at 2014 we expect an increase in provisioning across all the banks under our coverage”. CardinalStone stated.
Vetiva in its economic outlook for the year noted that the impact of declining oil prices and currency pressure on banks’ assets quality has been significant, dampening DMBs willingness to lend.
‘Whilst we note that CBN plans to spur credit growth to the real sector by ensuring that the liquidity from monetary easing is directed towards infrastructure, agriculture and solid minerals, we do not expect the easy money to trigger any substantial credit growth in 2016 as macroeconomic policy remains uncertain’, Vetiva Capital noted.
Banks have witnessed two years of consecutive strong loans growth, but credit weakened in 2015 as banks cut their portfolio exposures to companies in the manufacturing, oil & gas sectors as well as consumers loans.
However, rising operating cost and cost of funds are also identified as part of constraints that the banks would face going forward. While these are rising on the back of tough operating environment, the apex bank is mulling the sector’s profit drivers.
In the past year, the CBN adjusted banks FX Net Open position as a way to curb round tripping and related practices allegedly perpetrated in the industry. Then, commission of turnover was completely removed which analysts have estimated to have low down potential profit by banks at about N100 billion annually.
To minimise the impact of regulation, it has been projected that banks will embark on aggressive deposit mobilisation to provide buffer to cost of operations.According to analysts, Banks will have to increase efforts to remain profitable and lend more to viable sectors of the economy to achieve their profitability targets.
Meanwhile, there is an indication that some banks may be having issues with their capital mix. Last year, the apex bank was quoted to have said that three banks may need to shore up their capital. Retrospectively, the CBN withdraw the statement; which was viewed by analysts tas after thought perhaps to avoid a run on the banks.
In its note, Vetiva capital analysts forecasted that a number of banks would require capital raising in the year in order to support any robust credit growth. Currently, banks are expected to maintaining capital adequacy ratio (CAR) of 15 per cent while the systemically important banks’ CAR has been reviewed upward to 16 per cent by June, 2016.
Banking sector profitability is expected to dwindle in 2016 as the apex bank in its circular requires that DMBs should double their provision starting from this year. General provision of two per cent is expected to be made on performing loan in financial year 2016 as against one per cent in 2015.
“Business environment is tough, private investment has bolted and the CBN has ushered in some level of cutbacks to DMBs profit as a result of increasing regulation. Banks are quite liquid but they are scared to the marrow on viable sector to support as uncertainty remains”, Financial Consultant that prefers not to be mentioned told BusinessHallmark.
Analysts are in agreement that Banks are to cut dividend pay-out further considering that earnings have come under pressure of late and are expected to remains so in the near term coupled with the need to build up adequate buffer in a bid to support future growth opportunities.
But Tier I capital banks are expected to maintain status quo in term of dividend payment. However, most of equity analysts that spoke to BusinessHallmark are weary about the ability of FBNH dividend outlook.
It may be recalled that CBN has in a directive required that banks with deficient Capital Adequacy ratio would not be allow distributing dividend to its shareholders. The apex bank had restricted banks with CAR below 15% or non-performing loan above 10 per cent from paying dividend. But, banks with NPL ratio between regulatory benchmark of five per cent and 10% are restricted to pay a 30% maximum dividend payout from earnings.
In 2014, Tier II capital banks recorded an average 29 per cent of their earnings while Tier I capital doled out as much as 49 per cent. Analysts at Vetiva Capital in their notes are projecting that Tier I capital banks are expected to distribute 37% and 25% payout ratio is expected from Tier II banks.