Nigeria’s largest banks have taken N263.13 billion in impairment charges for credit losses in 2020 as the coronavirus pandemic accelerates the rate of provisioning.
The virus battered business and personal income alike, and the country slipped into its second recession in 6 years in 2020, but a rebound in crude oil price and contribution from the telecoms sectors helped the country exit the economic slump in the fourth quarter.
A loan loss provision is an income statement expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover different kinds of loan losses such as non-performing loans, customer bankruptcy, and renegotiated loans that incur lower-than-previously-estimated payments.
Analysis by MoneyCentral shows the combined loan loss expense for the largest lenders increased by 89.82 percent to N263.13 billion in December 2020 from N138.61 billion as at December 2019.
Notably, banks wrote off more loans as irrecoverable in 2016, when a sharp drop in crude oil price of mid-2014 dealt a great blow on companies’ cashflow, and lenders reeled from deteriorating asset quality as they were exposed to the oil and gas.
Interestingly, impairment losses are also anticipated to surge on the back of guidelines prescribed by IFRS 9.
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.
In June 2020 Nigerian banks applied to the Central Bank of Nigeria (CBN) for permission to restructure 33 percent of their loans due to the fallout from the coronavirus pandemic and a slump in oil prices.
Aishah Ahmed, deputy governor of CBN, said total of 17 banks had submitted requests to restructure more than 32,000 loans for individuals and businesses impacted by Covid-19.
In May 2020, First City Monument Bank (FCMB) Group Plc said it planned to restructure half of its loans after impairment charges surged 61 percent to N3.7 billion naira ($9.5 million) in the first quarter.
The non-performing loans in the banking sector rose by N333 billion as at the end of the third quarter(Q3) of 2020 to N1.5 trillion at the end of 2020.
Zenith Bank, the largest lender by profit, saw impairment charge spike by 39.21 percent to N39.53 billion in December 2020 from N24.03 billion the previous year.
The lender had written off more loans as irrecoverable in 2017 with record impairment charge of N98.13 billion, according to data gathered by MoneyCentral.
Access Bank, which became the largest lender by total asset after it acquired Diamond Bank in 2018, saw impairment charge rise to a four year high of N62.89 billion.
Guaranty Trust Bank, the largest lender by market capitalisation, saw impairment charge surge by 74.90 percent to N19.57 billion in the period under review as against N4.91 billion the previous year.
Stanbic IBTC Holdings’ loan loss expense surged by 83.57 percent to N9.35 billion in the period under review as against N1.63 billion the previous year.
There is light at the end of the tunnel for operators in the industry as the gradual reopening of businesses, rapid acceleration of vaccinations, and a rebound in crude oil prices are expected to bolster cash flow of firms, which means customers will soon be paying back loans.