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Banks’ Q3 Impairment Charges Highest Since 2016 on Naira Devaluation

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Soaring impairment charges on financial assets by the largest listed banks in 2023 brings dark memories of the economic downturn of 2016 when a precipitous slump in crude oil price of mid-2014 plunged the country into its first recession in 25 years.

“Just as Naira depreciation resulted in a strong FX gain and increased the size of the loan book and overall balance sheet, the Naira depreciation also ballooned the absolute Naira value of the non-performing loans and required higher impairment charge, given the sizable dollarisation of the bank’s loan portfolio,” said Abiola Rasaq, former head of investor relations at United Bank for Africa (UBA) Plc.

“Interestingly, some FX obligors have also seen relative impairment in their ability to service the loans, especially those with Naira revenues but FX loans, thus the stage 2 loans also required more provisions in line with the signs of stress on the customers’ repayment capabilities,” said Rasaq.

Similarly to when currency volatility and an unstable macroeconomic environment ballooned the loan loss expense of banks eight years ago, the largest lenders saw their combined impairment charge on financial assets surge by 269.53 percent to N666.87 billion as at September 2023, according to data compiled by MoneyCentral.

Loan loss expense for these firms surged by 153.98 percent to N306.95 percent in September 2016, and it spiked by 154.69 percent to N120.18 billion in September 2015.

However, impairment charges were down 19.79 percent to N245.61 billion in 2017, the year that saw the introduction of a new foreign exchange window and uptick in crude oil price help the country exit a recession.

Analysts attribute this increase in loan loss expense in 2023 to the weak macroeconomic outlook, given the high interest rate environment as they expect banks to remain cautious with regards to loan growth to avoid further deterioration in asset quality.

The devaluation of the currency brought on by the unification of the exchange rate mean banks is having a negative impact on asset quality as  the removal of subsidies on Premium Motor Spirit (PMS) has undermined economic growth

Nigeria’s annual inflation rate rose to 27.33 per cent in October from 26.72 per cent in the previous month, the National Bureau of Statistics (NBS) said.

Nigeria’s Gross Domestic Product (GDP) grew by a tepid 2.54 percent (year-on-year) in real terms in the third quarter (Q3) of 2023.

Banks have also been hit by a 40 percent devaluation of the currency after newly elected President Bola Tinubu moved to a more market friendly set of reforms.

It is worthy to note that in the third quarter (Q3-23), Guaranty Trust Holding Company (GTCO) reported a total reversal of N22.20 billion in impairment charges taken on investment securities, placements and contingents.

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