A recent report has indicated that Nigerian banks wrote off a minimum of N1.9tr worth of bad loans in four years dating back from the 2015/2016 recession until now.
This is contained in the 2020 Banking Industry Report published by Agusto & Co, a leading Credit Rating Agency in Nigeria.
The report posited that Nigeria’s weak macroeconomic climate was a major contributing factor to the loan write-offs. Also, the 2019 introduction of the International Financial Reporting Standards, IFRS 9 accounting standard played a major part.
“In the last four years, following the 2015/2016 recession, the Nigerian banking industry has written off a minimum of ₦1.9 trillion of impaired loans from its loan portfolio. This volume of write-offs has been driven by the weak macroeconomic climate and the introduction of the IFRS 9 accounting standard in 2019.
In the wake of the unprecedented COVID 19 pandemic, the Industry’s asset quality is further threatened given significant exposures to vulnerable sectors. The Central Bank of Nigeria (CBN) has granted palliatives to banks in form of permitted loan restructurings to certain sectors that have been severely affected by the pandemic and we expect this to moderate the anticipated level of asset quality deterioration in the short term” the report stated.
Recall that during last week’s Monetary Policy Committee, MPC meeting of the Central Bank of Nigeria, Governor Godwin Emefiele had disclosed that about 22 commercial banks have so far restructured N7.8 trillion worth of loans (or 41%), out of a total of N19.9 trillion, for some 35,640 customers. Emefiele posited that it is better to restructure up to 65% of loans instead of allowing such loans to go bad.
Now, the COVID-19 pandemic has presented another serious threat that could significantly affect banks’ asset quality in the long-run. Many sectors of the economy have so far been negatively impacted by the pandemic. And banks are significantly exposed to most of these sectors, including oil and gas, hospitality, and aviation.
Recall also that Augusto & Co had earlier projected that Non-Performing Loans in Nigerian banks are expected to rise to 13 percent in the wake of the COVID 19 pandemic.
“We have revised our NPL ratio expectations to 13% in the short term. Our revised forecast is a moderated revision of CBN’s 2016 stress test on the impact of the lower oil prices on the banking industry’s loan book. Our forecast assumes that with crude oil prices averaging $30-$35 per barrel, a proportion of the oil and gas loan book will be impaired. We also expect a rise in impairment levels in other sectors.
However, our prognosis may be somewhat moderated by the forbearances granted by the CBN to banks to cushion the impact of the pandemic on the Industry’s performance. These forbearances include the allowance for restructurings of loans to businesses and individuals highly impacted by the pandemic, such as hospitality, manufacturing, and oil and gas firms, to reflect challenges in the sectors.
In addition, the banking industry tightened credit risk management following the 2016 recession, shifting to short-dated, cash-backed trade transactions that self-liquidate and converting some unhedged FCY loans to naira loans for instance. Notwithstanding, we recognize that some banks are still in the process of cleaning up the loan portfolio from the last recession” Augusto & Co projected.
