Business
Banks may suffer NPL spike as businesses groan
BY EMEKA EJERE
Banks in Nigeria are likely to see a surge in bad loan component of their balance sheet by the end the current financial year due to continuous decrease in the capacity of their obligors to either service or repay their loans.
Findings reveal that the harsh operating environment aggravated by COVID-19 disruptions and foreign exchange liquidity crisis, among other factors, is taking a huge toll on the fortunes of most businesses in the country.
The Non-Performing Loan (NPL) ratio measures the rate of bank loans that are either going bad because they are not being serviced adequately or have gone bad completely.
According to the financial reports of the banks released in April this year to the Nigeria Exchange Limited (NGX), five of the major banks in the country posted a whopping N683bn NPLs in the 2020 financial year.
The bad loans were linked to the downturn in the economy as a result of the COVID-19 pandemic and other factors.
The five Tier-1 banks are Access Bank Plc, FBN Holdings Plc, Guaranty Trust Bank Plc, United Bank for Africa Plc, and Zenith Bank Plc, which reported N161.2bn, N170.7bn, N111.46bn, N120.08bn and N125.24bn bad loans respectively.
Further analysis showed that while FBN Holdings and GTBank reported NPL ratios that were above the prudential guideline of the Central Bank of Nigeria (CBN) put at five per cent, Access Bank, Zenith Bank and UBA recorded NPLs that were within the regulatory threshold.
The banking industry had witnessed a 14 percent rise in NPLs in the first half of 2020 ending a two-year trend of continued decline in NPLs since Q3 2018. According to the banking sector report released by the National Bureau of Statistics (NBS) at the time, NPLs in Nigeria’s banks increased to N1.212 trillion at the end of June 2020, from N1.059 trillion recorded in December 2019, indicating that NPLs across Nigerian banks rose by N152.4 billion or 14.38 percent in six months.
Specifically, findings showed that the 11 banks cumulatively incurred N342bn impairment charges during the 2020 financial year, compared to the N181.95bn recorded in 2019. This indicates a whopping 87 per cent increase in impairment charges.
With the operating environment getting harsher by the day, analysts fear the situation will get even worse this year. A clear pointer to the gloomy outlook is the revelation last week that the harsh operating environment in the country has caused the fortunes of local manufacturing firms to plunge by 50 per cent in the first half (H1) of 2021.
Bleeding Manufacturers
The manufacturers, all listed on the NGX, were severely impacted by low capacity utilisation on the account of huge import levies, exchange rate volatility, haulage costs of imported raw materials and heavy dependence on alternative source of power that has increased production cost by 30 per cent.
Worried by the widening chaos in the sector’s key performance indicator, operators have urged the federal government to reschedule existing loan repayment obligations and grant tax holiday to companies to avoid erosion of equity investors’ dividend payout in 2021 full year result.
The prevailing forex scarcity and inflationary pressures on households and logistics, as well as regulatory bottlenecks on imported raw materials are directly affecting the margins of these firms, resulting in a fall in demand, sales volume, revenue and underlying profits of the players, especially in the half year operations.
The share price of these companies on the Exchange appears to be the worst hit. Price movement of some stocks under the sector had remained stagnant in the past few years, following negative sentiments that have enveloped demand for the stocks.
A four-year assessment of the share price of these companies from 2017 indicated that Nestle stock price, which stood at N1,550.99 as at December 2017 declined to N1,400 as at close of transactions on Thursday, November 10, while Cadbury share price depreciated from N15.67 to N9.36.
NASCON share price declined from N18.50 during the period to N14.15. GSK, which rose to N21.61 in 2017, then dropped to N6.40. PharmDeko also depreciated from N2.36 recorded in 2017 to N2.11..
Over the past five years, the manufacturing sector has averaged real Gross Domestic Product (GDP) growth of -0.9 per cent. However, the sector has contracted thrice, in contrast to prior five years where the sector averaged a growth of 13.3 per cent, reflecting the struggles of the general business operating environment and unease of conducting economic activities profitably.
Dying MSMEs
The Chairman, Lagos Chamber of Commerce and Industry (LCCI), MSMEs Group, Daniel Dickson-Okezie, recently revealed that impediments posed by lack of foreign exchange and other challenges have caused about 85,000 Micro Small and Medium Enterprises (MSMEs) in Nigeria to close shop between 2020 and 2021.
Dickson-Okezie, who was citing KPMG statistics, also noted that 20,000 to 22,000 MSMEs wound up in Lagos in the same period.
“From KPMG statistics and research 85,000 SMEs closed down in Nigeria and about 20 to 22,000 shut down in Lagos between 2020 and 2021. I don’t have the statistics, but KPMG is a reliable agency.”
He noted that the small businesses shut down as a result of COVID -19, forex and other challenges, admitting that SMEs were going through a lot of difficult times in the history of the country, “so I’m not surprised at the figure.
“Already, the economy was in bad shape before the pandemic hit the country, which led to a lockdown that devastated almost every sector. The aggregate demand dropped. People needed the purchasing power to buy because income decreased as they were locked in for some time.
“To make the matter worse, rising cost has been a major challenge to SMEs. Cost of electricity, fuel, virtually cost of everything increased; market price increased. When inflation rate is high, forex not favourable, exchange rate is getting worse by the day, at the end of the day it’s difficult for SMEs to do business because they have lesser capacity to withstand shock and the challenges of business.
“These challenges affect all businesses not just small businesses, but the big ones or the multinationals have better capacity to withstand any decline or sudden challenge.”
Reacting to the development, the Chairman, Progressive Shareholders Association of Nigeria, Mr. Boniface Okezie, said the challenging economic situation had impacted borrowers and their businesses.
He said, “Banks making higher provision for impairment charges means all is not well with our economy. It has become a problem in the banking sector as the economy generally is not working. The problem is that those who borrowed money to do business are not finding things easy.
“Nigeria is not exporting rather than importing, which is creating more problems. We have a lot of business problems in the system and it is affecting a lot of loans banks are lending to support the real sector. CBN can’t continue to over-stress the banks. The government’s policies are killing the banks.”
The National Coordinator Emeritus, Independent Shareholders Association of Nigeria, Chief Sunny Nwosu, advised the federal government to fulfill its promises to the banking sector by giving them palliatives as regards the COVID-19 lockdown.
He said, “If the government should intervene in the banking sector, it will reduce some of the debt they might have incurred during the period of COVID-19 lockdown.
“The period came with hazards, difficulties doing business, and the period also restricted capital flow to the SMEs sector.
“Last year was a difficult year for banks as we had lockdowns. Those businesses with advance money could not perform as they could have loved to. If the banks can manage such loan loss to that level in the 2020 financial year and they were able to pay dividends to the shareholders, then I think they have done very well.”
Analysts believe the nation’s banks incurred higher impairment charges against the backdrop of the Central Bank of Nigeria (CBN’s) directive asking lenders to meet the 65 per cent Loan-to-Deposit ratio.
In a bid to drive lending to the real sector, the CBN had in 2019 directed all banks to maintain a minimum of 65 per cent Loans-to-Deposit Ratio (LDR) by the end of December 2019.
This seems to have yielded result as the Nigerian banking sector’s credit to the private sector rose by N4.1tn or 13.8 per cent between September 2020 and September this year, according to the CBN’s Money and Credit Statistics Report. The report showed that in September 2020, bank’s credit to the private sector stood at N29.7tn but rose to N33.8tn in September this year.
Meanwhile, the Manufacturers Association of Nigeria (MAN) has said that local sourcing of raw materials remains one of the solutions to foreign exchange unavailability and optimization of hard earned foreign exchange.
Speaking at the 54th Annual General Meeting (AGM) of the Ikeja branch of MAN recently in Lagos, the chairman, Otunba Francis Meshioye, noted that some of the companies have already taken the lead in the local sourcing of their raw materials, which automatically increases the local content value of their products and hence put them on edge in the market.
The theme of the AGM was ‘Repositioning Nigeria manufacturing sector in the emerging continent for sustainable growth and profitability.’ Meshioye stressed that sourcing raw materials locally will drive up “our competitive and comparative advantages, open up more industrial sectors, increase our ingenuity and creativity via research and development.
“It increases our patency rights and thus enhances our knowledge economy. It creates more employment and of course the ripple effects of local raw material sourcing will certainly improve socio economic development in the country.”