Lamido Sanusi

A combination of conscious efforts on the part of money deposit banks to shut the door against potentially toxic loans and a regime of close supervision from the Central Bank of Nigeria is set to rid banks of the burden of non-performing loans in 2012, reports Festus Akanbi

From all indications, the rescue mission embarked upon by the Asset Management Company of Nigeria (AMCON) may have started paying off as feelers from banks showed that the issue of bad loans in their operations has been effectively laid to rest. Industry watchers told THISDAY last week that from a book quality perspective, 2012 is turning out to be different from 2011. Industry sources explained that the march towards a clean bill of health was largely undertaken last year as most of the banks decided to embark on a bigger and deeper clean-out in FY11. Sources said the reluctance of banks to embark on risky ventures largely explained the low credit profile of the industry operators between 2011 and the first quarter of 2012. A banking analyst who spoke to THISDAY said none of the operators will like to carry the burden of non-performing loans at least for now. He pointed out that almost all the banks are now taking risk management very seriously having learnt from past experience when substantial number of banks burnt their fingers. He said aside from the individual efforts of banks to maintain a clean slate, the present leadership of the Central Bank of Nigeria (CBN) is giving the industry a closer monitoring to avert a repeat of the crisis that caused a serious set back in the nation’s banking industry in 2009 when it came on board.

At the end of the 2011 financial year, it was obvious that the banks were neck deep in measures to come out clean in their 2012 performance an excuse given by a number of banks that posted not so encouraging results for their 2011 operations. The development was confirmed by the international financial advisory firm, Renaissance Capital Limited, in its recent report on the big five banks in the country, noting that with the exception of Access Bank Plc, the  non-performing loan ratios for the banks are now sitting below the 5% CBN guideline. The big five banks are First Bank of Nigeria Plc, Guaranty Trust Bank Plc, Zenith Bank Plc, Access Bank Plc and United Bank for Africa Plc.

According to the report, “The banks are now sitting on low NPL ratios which, in our opinion, should carry them through the next few years. Beyond that horizon, we are still of the view that those banks which historically have been poor at risk management and have not made significant or sustainable changes to the way they manage risk, are likely to face fresh problems with their books’ future years.” In terms of the robustness of the measures put in place to tame the NPL level, Rencap said Guaranty Trust Bank and Zenith Bank are leading the pack.

It said: “As we highlighted in our previous report entitled Nigerian banks: a whole new day, again, dated 29 February 2012, we believe the frontrunners in terms of credit risk management and book quality are GTB and Zenith.

“On coverage ratios, while they appear high we highlight this has nearly always been the case with Nigerian banks. It has not necessarily been of much use in years when large write-offs had to be taken as in FY11. Coverage ratios are now sitting close to 100%. The bottom line is that impairment costs are likely to be benign this year. We have been conservative in our forecasts and we believe the risks to our forecasts are on the downside i.e. impairment costs could come in lower than we expect, benefiting from recoveries and write-backs. Annualised 1Q12 impairment charges were very low (negative in UBA’s case), with a sector average of 0.4% vs. 4.5% for FY11”.

The report, however, noted that although there were improvements in risk management in banks, it would be erroneous to see the development as a blanket one among banks.

It added: “While we acknowledge there have been some improvements in risk management, we are not convinced that these improvements have been sufficiently significant across the entire banking sector.

“Our discussions with most banks (especially the smaller banks) on this topic still leave us pondering whether any sustainable changes have actually taken place. Most of the risk management seems to centre on imposing sector limits (as a percentage of gross loan book) in addition to adhering to the CBN guidelines for single obligor limits (20% of capital). In some of the banks, new management in risk and credit has been installed but it is too soon for us to judge their impact on book quality.”

A bank chief executive who provided an insight into the current trends in banks said another factor that would help breathe live into banks’ books in the current dispensation is the adoption of the International Financial Reporting Standards (IFRS), which has replaced Generally Accepted Accounting Principles (GAAP). GAAP refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards.

He explained that under Nigerian GAAP, banks raised specific provisions on a loan when there was clear and objective evidence that they would not be able to collect all amounts due on that loan. The impairment raised was based on the CBN Prudential Guidelines for Deposit Money Banks in Nigeria and ranged from 10% for sub-standard NPLs to 100% for those classified as loss. In addition, Nigerian banks were required to raise a 1% general provision on performing loans.

Rencap said in its report that “Under IFRS, the main difference is the inclusion of collateral in calculating the level of provisions to be raised. It requires impairments to be determined on an “incurred loss” basis where there is objective evidence of a loss event after the initial recognition of the loan as opposed to expectations of future losses. The impairment raised is the difference between the carrying amount of the loan less the recoverable amount, which includes the value of collateral. The recoverable amount is calculated as the present value of expected future cash flows discounted at the original (as opposed to current) effective interest rate. Impairments are calculated individually or on a portfolio basis for loans with similar characteristics.”

Counting Gains of IFRS
THISDAY gathered that the application of IFRS is already improving the positions of some banks as far as the levels of their impairment are concerned.  As Rencap puts it, “GTB has been the least affected with a minor upward revision of 3%, while Access has had a large upward revision of 29%. First Bank of Nigeria Plc, Zenith and UBA Plc have all benefitted from significant downward revisions in impairment charges ranging from 20-38%. Our discussions with the banks have shed little light on why these revisions have been so significant with most teams pointing out they no longer need to take the 1% general provision for performing loans and that impairments are now done on an individual, case-by-case basis.

“From a bottom-line perspective, IFRS has been most beneficial to First and UBA which saw 46% and 43% respective improvements in net profits. Access was negatively impacted (-9%), largely on the back of the higher IFRS impairment costs and a higher tax rate. GTB was marginally impacted (-4%) by slightly higher impairments and operating costs with the CIR rising to 46.5% under IFRS vs. 45.5% under GAAP. We attribute the difference in operating costs to differences in the treatment of staff costs (including entries such as accrued leave pay etc.) and occupancy costs. Zenith’s numbers were a touch higher (+4%) with the lower net income offset by lower impairment and operating costs and a slightly lower tax rate.

”Explaining the rise in impairment charges for Access Bank under IFRS, the report said the reason would not be far from the recent increase in the level of its portfolio”.

Under GAAP general provisions were set at 1% of performing loans. Under IFRS, the book’s actual loss history and the portfolio credit grading are key drivers of general impairments. This implies general provisions could be higher under IFRS for some banks, which have had a challenging credit loss history.

UBA benefited with its net loss reducing from N10.5bn to N6.0bn, on our numbers. The step change is largely due to the N12.0bn decrease in the impairment charge for FY11 under IFRS which more than offset the lower income from operations (-5%). First Bank was also a significant beneficiary under IFRS with net income rising 46% vs. the reported GAAP numbers. Similarly for First, the big difference is in the impairment line which added N22.8bn to the IFRS pre-tax numbers. Bottom line net earnings increased from N45.7bn under GAAP to N66.5bn under IFRS.

AMCON on Recovery Mission
AMCON recently reiterated its commitment to recover all debts owed it by money deposit banks, saying the debts have not been forgiven.  AMCON Managing Director Chike Obi made the statement at a recent road show organised in Abuja by the company to enlighten the public on its operations and achievements, saying the corporation is resolved to pursue the debtors and recover all outstanding loans within the next two years. 

An executive director of the company, Foluke Dosumu, explained that what AMCON did by purchasing a total of N4.2 trillion toxic assets at a cost of N1.7 at a proportion of about 44 kobo to a naira was to clean up the balance sheet of all the Nigerian banks by purchasing all loans that were not performing and those that had exceeded single obligor limits or which constituted systemic risks to the Nigerian banking sector. “The obligors now owe AMCON, meaning that those loans that it has taken over from the banks are now owed to AMCON. It is important to stress that within the AMCON law, it has extra powers to go after these obligors to ensure that these loans are fully paid. These loans are not forgiven, therefore it is an illusion to think that when the loans come to AMCON, the obligors no longer owe. They indeed owe and AMCON intends to recover those loans,” she stressed. AMCON was established in 2010 to buy up the non-performing loans of the nation’s banking system and recapitalise eight fragile banks that almost collapsed but for the timely intervention of CBN.