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Rising NPLs threaten new CBN credit policy



Only 57.4m of Nigeria's 200m people have BVN – CBN

•The level of NPL reflects the loan book – Zenith bank


Indications have emerged that banking sector non-performing loans may likely hit double digit mark at the end of financial year 2019. In the second quarter of the economic year 2019, banking sector non-performing loans pitched at 9.3%. This may be a direct consequence of the Central Bank of Nigeria’s loan- deposit ratio policy, which has left many banks scrambling for compliance.

This prediction is made following the apex bank revised loans to deposits directive to banks, and third quarter signal from amount of impairment charges booked by Tier 1 banks. CBN had in July directed banks to meet a credit level of 60 percent of all deposit by September 30, 2019.

The sanction for non compliance is to debited up to 50 percent of the default amount which will be warehoused by the Bank. Consequently, at the expiration of the deadline, 12 banks were debited N499 billion as the un-loaned percentage of the deposits with them. Generally, banks have been cautious of their non performing loans books after the previous crisis which led to the creation of AMCON in 2011.

Tier 1 bank controls some 80% of the banking sector earnings, and therefore their relevance to the economy cannot be underestimated. Records reveal high default rate followed by associated impairment charges on the banks which is likely to threaten CBN single digits NPL ratio target.

To that extent, the third quarter of financial year 2019 sends ominous signal that banks assets quality may be on a decline again, as a number of Tier 1 banks impairment on credit losses increased in third quarter of 2019.

While the market awaits third quarter earnings release from Access Bank Plc, except FBNH that have been undergoing balance sheet repairing and restructuring, the amount of impairment charge on credit losses booked by Zenith and GTB increased. Analysts anchored the trend around increased exposure to loans and advances.

MarketForces Research revealed that introduction of the loans to deposit ratio benchmark is as a result of the fact that CBN moral suasion have failed to achieve result on the refusal of DMBs to increased lending to the real sector of the economy. The firm periodical report however stated that apex bank policy on loans to deposits ratio is not without disadvantages.

In the individual nine months results, impairment on credit losses booked signify a new era of poor assets quality.

The value of GTBank’s impairment on credit losses spiked by about 60% to N2.761 billion from the corresponding period in 2018.

Zenith Plc impairment charge also increased. In its 9-months result, the bank booked N18.3 billion which represents 27.3% increase against N14.3 billion charged against income statement in the comparable period in 2018. Its loans had increased by 9.2% year to date, from N2.497 trillion at the beginning of the year to N2.72 trillion in September.

UBA Plc however reduced its impairment charge as result of recoveries made from previous loans written off, and reversal on allowance on credit losses made to banks.

Mr. Marcel Eguabor, Group Head, Corporate Communication at Zenith Plc relates the increased impairment charge to the increase loans book in the period.
Some critics are of the view that listed companies are existing to increase the wealth of their shareholders, thus forcing non-government own banks to lend 65% of their total deposits collection under rate free market decision.

Generally, with the increase in credit to the real sector, significant chunk of which operators are expected to channel to small and medium sector, analysts expect non-performing loans to skyrocket, again.

Mr. Jide Famodun, Financial Consultant at LSintelligence said that recent directive from the apex bank would reflate average non-performing loans in the banking sector. He noted that increased provision from third quarter earnings season looks like ominous signal and this could threaten the CBN 5% NPL target.


It would be recalled that the industry’s NPL rested at 10.8% at the end of first quarter 2019. This marked the lowest in the last 5 quarters, at least. Total non-performing loan in the banking sector closed at N1.44 trillion at the end of second quarter in the financial year 2019. Early in the year, non-performing loans was 10.79%, having nosedived from 11.67% in the fourth quarter of 2018.

Meanwhile, in the third quarter of 2018, NPL level was steep; it pitched 14.16% from 12.45% in the second quarter of 2018. It was however observed that NPL from manufacturing sector declined 18.39% from N136.07 billion at the end of second quarter in 2018 to N111.04 billion.

In the second quarter of 2019, government related loans and advances show red signal, as NPL in the segment surged from N560 million in second quarter of 2018 to N1.33 billion.

In an efforts to channel credit to the real sector of the economy, the Central Bank of Nigeria through its regulatory oversight asked banks to lend 65% of their deposits collection to customers. Failure to meet the target would attract sterilization of banks funds with the CBN.

Analysts at Tellimer of London think that the directive poses grave asset quality risks. They are of the opinion that the directive issued to banks is direct interference with free market. The rush to booking more loans would means an increase in the banking sector non-performing loans risks, analysts at MarketForces said.

Critics are concern that CBN is heavy in term of regulation, and uses carrot and stick method to control how banks manage their operations. To achieve CBN demand, some banks may have to lower risk criteria when they are assessing credit application in order to meet the CBN directive. This would result to increase in non-performing loans in the industry ultimately.

The CBN further stated that failure to meet the regulatory requirement by the stated date would result in charge of an additional Cash Reserve Requirement (CRR) equal to 50% of the lending shortfall of the target LDR. Banks have been bearish on booking more loans since 2016 when the recession hit.

The CBN had expressed worry over rising case of loan default which led to expanded non-performing loans in the sector. The industry NPL was at about 15%, a spike in banks toxic assets jerked up. Due to need to clean up balance sheet, banks increased investment in the fixed income market.

At the time treasury bills yield rates was as high as 16%, before government securities started moderating. Analysts at Tellimer said that this directive may pose asset quality risks to the sector, as banks may have to lower risk criteria to achieve the CBN’s threshold.

Tier 1 banks were not practically lending, given their positive cash position, they were able to closed earnings gap with yield from fixed interest rate market. Many of them ramped up deposits from customers but failed to lend to real sector.

Thereby, total productive money in circulation reduced and productivity receded, and then resulted to increase in unemployment rate. In the third quarter of 2018, unemployment rate hit all time high at 23.1%.

The penalty for not meeting the threshold by the set deadline is an additional CRR levy equal to 50% of the lending shortfall of the target threshold, which would be likely to restrict banks’ ability to invest in government treasuries.

“We could see an outcome where banks choose a much higher CRR over rushing to achieve the loan/deposit threshold to manage asset quality headwinds.

“Bearing in mind that the CRR peaked at 50-60% for some well-capitalised banks (according to IMF Article IV, April 2019), there is bound to be pressure on margins and profitability due to this.

“We could also see banks showing less interest in taking deposits, in order to limit the loan growth required to meet the new loan/deposit threshold”, Tellimer stated.

The CBN’s directive favours SME, retail and mortgage loans, which would have a 150% weighting in computing the regulatory loan/deposit ratio. Analysts said that this segment has been an area of recent focus, and has been identified as a growth area by many banks in financial year 2019.


They observed that this would ideally raise the ‘regulatory’ loan/deposit ratio close to the benchmark and could help banks catch up a bit more easily, although the CBN maintains the right to define what constitutes such loans
Analysts at Meristem Securities consider the CBN decision as tightening the noose on banks with an array of regulations to spur credit to the private sector, a measure that could potentially increase the risk in the sector.

Mr. Idoko Negedu, GTB Head of Media, said he was not competent to speak on the matter it falls within the purview of the chief financial officer., who we could not reach at the time of going to press.

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