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Wednesday, September 27, 2023

Nigerian Banks Loan Loss Risk Minimal on Better Risk Management

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Nigerian banks are reaping the benefit of an excellent risk management strategy as they are not exposed to a risk of default from higher loan losses.

It appears they have learned their lessons following the exposure to oil and gas in the aftermath of the crude crash of mid-2014 which led to deteriorating asset quality.

The average total loans to asset ratio of the 10 largest lenders stood at 42.59 percent in March 2022 from 42.43 percent as at March 2021, according to MoneyCentral calculations.

The loans to assets ratio measures the total loans outstanding as a percentage of total assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. The higher the ratio, the more risky a bank may be to higher defaults.

Basically, total loans are an asset to the bank and they are prone to risk of default when customers are unable to meet their obligations.

The deluge of default is significantly responsible for bankruptcy, especially when there is no hope of loan recovery.

Nigerian banks’ non-performing loans (NPL) ratio rose to 5.3% in April 2022 from 4.84% held in February 2022, according to data from the Central Bank of Nigeria (CBN).

This is even as capital adequacy ratio (CAR) increased to 14.6% in April 2022 from 14.5% in December 2021, showing that it is above its prudential limit.

“The Non-Performing Loan (NPL) ratio stood at 5.3 per cent in April 2022, compared with its prudential limit of 5.0 per cent, reflecting sustained stability in the banking system, though there remains a need to bring this down to the prudential limit,” it the apex bank.

The total loans in the books of these 10 lenders hit N22.56 trillion in March 2022, which is 7.55 percent higher than 2021’s N20.97 trillion.

Their total assets were up 6.67 percent to N59.96 trillion in the period under review from N56.21 trillion the previous year.

On 2nd September 2021, the Central Bank of Nigeria (CBN) issued the guidelines for the implementation of the Basel III standard which is a voluntary global regulatory framework that addresses bank capital adequacy, stress testing, and market liquidity risk.

The Basel III accord was developed by the BCBS due to the impact of the global financial crisis of 2008 – 2009 on banks.

Given that the global financial crisis resulted in unprecedented losses and almost total collapse of the world financial system, there was a need for a critical rethink of risk management practices which were hitherto based on the Basel II Accord.

Thus, Basel III is the response to the deficiencies of Basel II and introduced major changes to the Basel II framework.

FBNHoldings’ total loans to asset ratio 43.83 percent; Zenith Bank, 34.41 percent; Access Bank, 35.47 percent; Guaranty Trust Holding Company or GTCO, 31.25 percent, and United Bank for Africa, 33.43 percent.

Some small and mid-sized lenders have a higher ratio, but they are in a strong liquidity position that paves the way for them to weather macroeconomic headwinds.

Fidelity Bank, 51.34 percent; First City Monument Bank, 44.38 percent; Stanbic IBTC Holdings, 31.36 percent; Union Bank 33.41 percent;  Sterling Bank, 44.24 percent, and Unity Bank,  85.41 percent.

A lot of banks restructured a percent of gross loans under the CBN COVID Forbearance, as they increased growth of LCY loans to mitigate the impact of currency devaluation.

The reopening of the economy that allowed customers to service interest on loans led to the reduction in impairment charge in financial assets.

The regulator has been keeping an eye on liquidity and capital positions of banks so as to avoid a financial crisis capable of destabilizing the economy.

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