The increase in bad loans caused by lockdowns imposed by the government to combat the spread of the virus has compounded the woes of banks who have already foregone profit growth.
A shortage of dollars and declining demand for credit, along with a plunge in domestic bond yields, has taken a toll on their bottom lines.
The largest lenders in Africa’s largest economy collectively grew net income by 5.36 percent to N662.51 billion as at September 2020, according to data compiled by MoneyCentral.
That compares with 2019’s increases of (+10.15 percent); 2018’s (+14.69 percent), and 2017’s (+17.49 percent), according to MoneyCentral data.
Most of the country’s biggest banks saw a decline in net income, including Guaranty Trust Bank, and United Bank for Africa, where Q3 profits fell by 3.20 percent and 5.57 percent respectively.
Significant contributions from non-interest income added impetus to the bottom line of lenders who realized sizable gains from financial instruments.
For instance, Access Bank saw net income increase by 15.67 percent to N102.30 billion as at September 2020, many thanks to a 106.15 percent surge in gains from financial instruments to N201.46 billion in the period under review.
Because such gains are one off events that are not expected to recur every quarter, further pressure on earnings is unavoidable. The country’s tepid economic growth also means there will be a spike in unpaid loans.
Nigeria’s gross domestic product shrank 3.6 percent in the three months through September from a year earlier, compared with a 6.1 percent, the statistics body said, as a lockdown to contain the Covid-19 outbreak, lower oil prices and rampant dollar shortage weighed on output.
Lenders need the economy to accelerate after restructuring 40 percent of their loans that would have soured and should have been booked as non-performing loans.
Analysts at United Capital Research have lowered their GDP growth forecast for 2020 from 2.30 percent to -2.69 percent.
The International Monetary Fund (IMF) has announced that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020. But the global lender expects Nigeria’s economy to rebound by 2.6 percent in 2021.
Analysts expect non-performing loans to increase significantly due to substantial exposure to some of the hardest hit sectors, especially oil & gas, manufacturing, and trade & general commerce.
They also expect a significant level of defaults as unemployment levels rise and salary cuts have become the order of the day.
By implication, impairment losses are also anticipated to surge on the back of guidelines prescribed by IFRS 9,” said analysts at United Capital Limited.
“The key import of IFRS 9 is the introduction of a forward-looking “expected loss” impairment standard that requires banks to provide more timely recognition of expected credit losses (ECL), based on future expectations, in place of the “incurred loss” model,” said analysts.