Nigerian banks’ total assets up 19% to N63trn in nine months
  • Calls for Banks’ recapitalization to forestall poor assets quality

By Julius Alagbe

Nigerian banks may face a major asset quality crisis as a result of the COVID-19 pandemic and consequent lockdown, which had led to the shut in the economy and disruption in the operations of businesses. Combined with the downturn in the oil sector, the is a significant chance of a spike in the non-performing loan (NPL) portfolios of banks, similar to the situation in 2009, that compelled banking reform subsequently.

To this end, Agusto & Co. a professional firm has projected a 13 per cent rise in NPL for the banks which will take it above the regulatory threshold and consequently undermine their asset quality. Agusto & Co stated that it expects the banking industry’s assets quality to weaken due to weak macroeconomic condition ushered in by coronavirus pandemic.

The research, credit rating and risk management company said heighten exposure to vulnerable industries threatens banks’ risk asset, thus expect operators to recapitalise in the short term. The firm hinged its view on the impact of COVID-19 on the finances of state governments, the performance of businesses and the purchasing power of households.

Agusto said based on the asset quality challenges and the naira devaluation, the firm envisaged some strain on the industry’s capitalisation ratios in the near term.

“Although the degree of the impact will vary across different sectors, key sectors that will bear the brunt are oil and gas (upstream and services), real estate, construction, transportation (aviation) and manufacturing (non-essentials)”, Agusto explained.

According to the firm, the sectoral distribution of the Industry’s loan portfolio will also determine the extent to which asset quality will deteriorate in the near term. It stated that the Industry’s exposure to vulnerable sectors threatens asset quality in the short term for the following reasons.

Firstly, the decline in global crude oil prices elicited by a slump in demand (due to economic lockdowns in several countries) will result in lesser revenues for oil and gas firms. This is also applicable to the government as crude oil proceeds account for about 60% of the sovereign’s revenues and 95% of the country’s export proceeds.

“Being the largest spender, a decline in the government’s revenues has a ripple effect on key sectors such as construction, manufacturing, real estate and general commerce”, Agusto noted.

Agusto stated that the Central Bank’s ability to defend the naira is threatened by lower foreign currency (FCY) revenues. This results in weaker macroeconomic indicators such as high inflation and currency depreciation and directly affect businesses and households, the rating firm noted.

The recent Organisation of Petroleum Exporting Countries (OPEC) quota adjustment – leading to supply cut – are aimed at easing pressures from the oil supply side to some extent.

“We estimate an average crude oil price of $30-$35 per barrel, bearing in mind that in the first quarter of the year, crude oil averaged $55.9 per barrel. Secondly, an anticipated further devaluation of the naira will bloat the Industry’s foreign currency loan book, which is dominated by the oil and gas, manufacturing, general commerce and other import-dependent sectors.

“This could weaken capitalisation ratios via higher risk-weighted assets and increase the level of delinquent FCY loans”, Agusto explained.

The firm said the disruption in the global supply chains is expected to increase demand for domestic alternatives for inputs used in the manufacturing sector.

“While this is good for the domestic market, the higher cost implications will adversely impact the margins of producers. This is because increased costs are not easily transferable to final consumers especially in a period of weakened consumer purchasing power”, the report reads.

Agusto further explained that the revenues of most business in the ‘non-essential’ manufacturing sectors will be hit by the general lockdown in the largest commercial centres in Nigeria.

The credit rating firm remarked that considering that the underlying issues of testing and contact tracing are still gradually progressing, with less than 8,000 tests carried out as at 20 April 2020, Nigeria faces increasing uncertainties that could push the economy into recession with as high as 7% contraction in GDP in 2020.

“Our preliminary forecasts (pre-COVID-19) for the industry’s non-performing loans (NPL) ratio for the 2020 financial year was 9.4% based on our expectations that major impaired loans would be written off, there would be growth in the loan portfolio and that the IFRS 9 impact would have moderated.

“However, with the COVID-19 pandemic and associated risks, we have revised our NPL ratio expectations to 13% in the short term, Agusto said.

It stated that the forecast is a moderated revision of CBN’s 2016 stress test on the impact of the lower oil prices on the banking industry’s loan book. Augusto said its forecast assumes that with crude oil prices averaging $30-$35 per barrel, a proportion of the oil and gas loan book will be impaired.

“We also expect a rise in impairment levels in other sectors”, the firm stated.

Agusto said the firm’s prognosis may be somewhat moderated by the forbearances granted by the CBN to banks to cushion the impact of the pandemic on the Industry’s performance. These forbearances include the allowance for restructurings of loans to businesses and individuals highly impacted by the pandemic, such as hospitality, manufacturing and oil and gas firms, to reflect challenges in the sectors.

Besides, the banking industry tightened credit risk management following the 2016 recession, shifting to short-dated, cash-backed trade transactions that self-liquidate and converting some un-hedged FCY loans to naira loans, for instance.

“Notwithstanding, we recognise that some banks are still in the process of cleaning up the loan portfolio from the last recession”, the firm stated.

Earnings and Profitability

The report said that earnings from the Industry’s core business will decline in the short term. The decline was on account of an expected rise in impairment charges, lower yields on the loan book and a contractionary monetary policy stance, exacerbated by discretionary cash reserve requirement (CRR) debits by the regulator.

The interest rate on Federal Government intervention funds granted through BOI and CBN to targeted sectors, which account for about 10% of the loan portfolio, was reduced by 400 basis points to 5% in March 2020, as part of the palliatives to support businesses.

This translates to a 300 basis points decline in yields on such loans for banks. Agusto said officially, the CRR for banks is 27.5%. It, however, the effective CRR for some banks are as high as 50% due to the CBN’s non-refund policy and the discretionary excess debits seen in the last few months.

Experts stated that penalties for breaching the minimum loans-to-deposit ratio (LDR) implemented as additional CRR debits also contributed to the spike. Thus, restricted funds with the CBN account for as high as 15% of total assets and are non-earning. In February 2020, the CRR for merchant banks was raised to 27.5% from 2%.

Agusto said: “Assuming the CBN was to normalise CRR to 10% of total assets; it would need to release about 5% of total assets.

“If these funds were granted as loans to the low-risk names in the private sector at an average of 14% per annum, this would add ₦300 billion to the Industry’s projected pre-tax income which translates to an additional 0.8% to our forecasted pre-tax return on assets.

“Based on our expectations that the Industry’s interest income will moderate and that funding costs will remain elevated owing to the high effective CRR and a possible increase in the prevailing interest rates, we foresee a decline in the Industry’s net interest spread by up to 500 basis points in 2020”, Agusto estimated.

The credit rating firm explained that non-interest income accounts for approximately 42% of the industry’s net earnings. It said it is largely driven by electronic banking activities, account maintenance fees, credit-related fees and securities trading income.

With the lockdown resulting in skeletal operations, banks have leveraged their electronic banking platforms to boost income as more banking transactions are only consummated through digital channels during the lockdown period. However, minimal trade activities will moderate credit-related fees, as experts said they expect some correspondent banks to pull back on their lines of credit.

Agusto said it also anticipates repricing by correspondent banks to reflect the elevated credit risks emanating from lower liquidity in the foreign exchange market. The firm stressed that outstanding obligations to foreign portfolio investors seeking to exist Nigeria stood between $700 million and $900 million as at April 2020.

It said the regulatory induced reduction in bank charges which became effective in January 2020 will also moderate non-interest income. Nonetheless, expected revaluation gains from a further devaluation of the domestic currency will support the earnings of banks with net foreign currency assets positions”, Agusto stated.

The firm said with expected pressure on revenue generation, cost containment will be a top burner in 2020.

“While the Industry’s operating costs are expected to increase on account of a rise in inflation and a growth in foreign currency denominated costs (such as technology-related expenses), we believe that cost management strategy will be paramount to sustained profitability”, the firm advised.

Nonetheless, Agusto & Co expects the Industry’s pre-tax return on average equity (ROE) to moderate to between 12% and 14% in 2020 unless regulatory support is granted in some areas such as a reduction in CRR.


Agusto explained that in recent times, the capital base of the banking industry has come under pressure owing to the IFRS 9 adoption and other asset quality issues that have resulted in major write-offs. Thus, tier II capital-raising activities heightened in the 2019 financial year up until the first quarter of 2020.

Agusto said based on the asset quality challenges and the naira devaluation, “we envisage some strain on the Industry’s capitalisation ratios in the near term”. However, this will be moderated by slower risk asset growth owing to the static business environment, increased profit retention, revaluation gains and the use of excess qualifying tier II capital to uphold capital adequacy ratios.

Agusto believes that CBN’s forbearances will cushion the impact of the COVID-19 pandemic on the Industry’s capital base. The banking industry will need to recapitalise in the short to medium term. The firm stated that this will be challenging considering the current environment and weak investor sentiments.

For banks that may be seeking to raise tier 1 capital, the weak valuations at this time – which has led to all the quoted banks trading at a discount to book values – may be a deterrent, the firm noted.

The three most valuable banks are currently trading below book values with Guaranty Trust Bank Plc trading at 0.89x its book value, Zenith Bank Plc at half its book value and Stanbic IBTC Bank Plc (0.97x its book) as at 20 April 2020. It said Tier II capital will be raised to support CAR up to the extent that it is permissible by the CBN and that market conditions are favourable.

“We believe that regulatory support will be required to implement rules aimed at protecting the banking industry’s profitability. The full impact of the COVID-19 pandemic will be difficult to measure in the near term. These are indeed difficult times for an industry that just barely recovered from the recession”, the rating company stated.

However, it added that despite various identified risks, opportunities exist.

“For instance, working capital needs of companies in key economic sectors will increase because of the naira devaluation and higher inflation, presenting prospects to grow loans to obligors with good business fundamentals in resilient economic sectors.

“We expect more bank customers to embrace digital banking platforms which could result in higher electronic banking income for banks. Furthermore, banks can leverage intervention funds provided by the CBN to susceptible sectors during this pandemic to grow loans.

“The Nigerian banking industry remains resilient and we expect this narrative to remain”, Agusto stated.

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