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A growing number of Nigerian lenders are seeing rising costs related with impairment charges for non-performing loans (NPLs).
In preparation to deal with the ballooning bad debts and future losses, combined provisions for the largest lenders rose sharply by 42.43 percent to N128.66 billion on souring loans as at September 2020, according to data gathered by MoneyCentral.
There had been marked improvement in loan losses since 2017 after the introduction of a new foreign exchange regime and rebound in crude oil price ease the flow of foreign currency in the market, however the current reality is worse than the recession of 2016.
For instance, loan loss expenses were down 38.15 percent in 2019; dipped by 47.12 percent in 2018, and fell by 21.11 percent in 2017, according to data gathered by MoneyCentral.
The coronavirus pandemic sent an unprecedented shock through the market as customers were unable to meet their obligations, forcing banks to write off such loans as bad, as the country slipped into its second recession in 5 years.
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 contraction in the previous quarter, according to the latest data from the National Bureau of Statistics (NBS).
Analysts at United Capital Limited expect impairment losses 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, according to analysts at united Capital.
The country’s banks remain susceptible to deteriorating credit quality due to their exposure to ailing sectors, especially the oil and gas producers, which account for the chunk of total loans as devaluation of the currency is another threat in the horizon.
Also, in the consumer lending space, analysts expect significant level of defaults as unemployment levels have risen and salary cuts have become the order of the day.
A string of stringent policies (hike in minimum loans to deposit ratio and caps on fees) by the central bank has added pressure on interest income, which has resulted in slow growth at the bottom line (profit).
Guaranty Trust Bank, the largest lender by market capitalization, saw impairment charge on financial asset surge by 267.40 percent to N10.14 billion as at September 2020, the first jump in four years as net income dipped by 3.20 percent.
Access Bank, the largest lender by customer base, saw loan loss expense surge by 222.70 percent to N34.24 billion as at September 2020.
United Bank for Africa’s impairment charge was up 72.23 percent to N11.47 billion in the period under review from N6.66 billion the previous year.
FirstBank Holdings’ loan loss expense increased by 64 percent to N46.67 billion as at September 2020 from N28.46 billion the previous year.
Ratings agency Fitch said in a recent report that the country’s asset quality will deteriorate faster in 2021 and beyond due to the lag effect of the pandemic on households and business, combined with the expiry of temporary debt-relief measures.
“The most likely scenario is the active restructuring of large corporate loans preventing a sharper hike in impaired loans. Such flexibility will not be afforded to consumer and SME loans and these segments will drive higher impaired loans over the longer term,” said the rating agency.