- All Tier 1 banks, others with highest exposure
By Obinna Chima
Inadequate gas supply due to pipeline vandalism, the looming threat of reversal of electricity tariff hikes, inability of power companies to sign gas supply contracts, and large amounts of debt owed to power companies by ministries, departments and agencies (MDAs) of the three tiers of government have raised concerns around bank loans to the power sector.
A report by Lagos-based CSL Stockbrokers Limited titled: “Banks and Power Sector Exposure,” obtained by THISDAY at the weekend, showed that the total power sector exposure of eight banks namely: FBN Holdings Plc, Zenith Bank Plc, United Bank for Africa Plc (UBA), Guaranty Trust Bank Plc (GTBank), Access Bank Plc, Diamond Bank Plc, Fidelity Bank Plc and Skye Bank Plc stood at N402 billion ($1.3 billion) in their full year 2015 financial results.
The report estimated that a default in power sector loans could raise banks’ cost of risk (COR) in 2016 from 2.4 per cent to 3.9 per cent in aggregate terms.
“We arrive at this by modelling the effect of a 30 per cent default rate on power sector loans. A rise in the COR of this order would lower our 2016 forecast aggregate net profits for the five largest banks by about 18 per cent and a more significant of about 95 per cent for the smaller banks,” it added.
However, it stressed that this would not lead to a crisis, just that it might come at a time when banks are already reeling under the weight of non-performing loans (NPLs) from the oil and gas sector.
Several banks gave loans to the power sector, including significant sums lent to purchase power generation and distribution assets during the privatisation programme.
Though most of these assets are currently performing according to the banks, gas shortages and a reversal of previous tariff hikes are likely to hurt power companies’ cash flow and could threaten the viability of these loans.
“If power sector loans become impaired, GTBank and Access Bank will be the least affected as they made very minimal loans to the power sector. UBA will take the greatest hit among the big banks while Fidelity Bank and Diamond Bank will be worst affected of the Tier 2 banks,” the report added.
The Nigerian power sector reform has so far brought little improvement to the country’s power situation. Privatisation of the industry in 2013 transferred generation companies and distribution companies to private ownership but has done little to increase Nigeria’s average output beyond 4,000MW.
Although the privatisation scheme was done with extreme care, with an elaborate structure and a number of government agencies to shepherd it through to success, there have always been two major sticking points: inadequate gas supply and unsustainably low electricity tariffs.
In February 2016, the Transmission Company of Nigeria (TCN) disclosed that Nigeria, for the first time in its history, generated over 5,000MW of electricity.
Power generation has, however, dropped significantly since the announcement was made. The operational report published by the Nigeria Electricity System Operator (NESO) as of July 25, 2016 showed that the country achieved peak power generation of 3,142.4MW on July 24 compared to a national peak demand forecast of 17,720MW.
Much of the blame has been ascribed to inadequate supply of gas to power plants due to pipeline vandalism. The generating companies have also recently complained that they have been unable to sign contracts to purchase the gas needed to generate power because banks have refused to provide them with letters of credit (LCs) to guarantee their purchases.
Power Minister Babatunde Fashola, in a bid to create a more viable tariff structure, directed the Nigerian Electricity Regulatory Commission (NERC) to meet with the 11 Discos and come up with what he referred to as a fair tariff system.
Consequently, a number of tariff hikes were implemented in 2015, with the last announced in December but implemented in February.
The last tariff hike resulted in the elimination of the fixed monthly charge that consumers were obliged to pay, irrespective of whether they had consumed electricity or not.
Fixed charges for most residential consumers were between N700 and N800 per month. The increase in tariffs for residential consumers introduced in February ranged from N8-N11.05/kwh.
For CSL Stockbrokers Limited, among the many problems preventing the efficient operation of the power companies, inadequate gas supply and low tariffs are the most serious in its view.
“Militant attacks on gas pipelines and transmission towers, coupled with the inability of power companies to sign gas contracts have resulted in abysmal power supply to households lately. Since power companies now only earn revenue when they supply power (no longer earning a fixed monthly charge), a disruption to supply due to shortage of gas is likely to significantly hurt revenues.
“This, coupled with a reversal of tariff increases may make it almost impossible for power companies to meet their obligations to banks.
“Already we have come across instances in which power companies have shown signs of strain. One of the banks we spoke to mentioned that it had had to resort to its debt service reserve account (DSRA) for some of its power sector exposures.
“The DSRA is a deposit which is equal to a given number of months projected debt service obligations, which serves to protect a lender against unexpected volatility or interruption in the cash flow available to service the debt. We think this may delay NPL recognition for some of these loans.
“We recognise that some banks are better at managing risks, hedging and securing collateral than others, and therefore the difficulties are unlikely to be experienced evenly.
“The power situation attracts a lot of government attention and we believe the government will be reluctant to see a complete failure of the power sector reforms.
“Consequently, there is a possibility that the government may intervene to help resolve the many problems threatening the industry and this restrains us from factoring in the above increase in COR into our core scenario for our bank forecasts,” it added.
Commenting on the situation in the power sector, the CEO, Financial Derivatives Company Limited, Mr. Bismarck Rewane, who spoke in a phone interview with THISDAY yesterday, said a lot of banks would definitely restructure their loans to the sector considering the situation in the economy.
“Many of the power firms borrowed in dollars and so they are hit by two things: One is the price of the loans and secondly the foreign currency component. So they have to be structured properly so that the terms of the loans are synchronised with the projected cash flows.
“Once the loans are structured and the debts are current, then the bank would not have to make any provision because there would be no impairments.
“If restructured, you have to give them moratoriums so that the cash flows would start coming. But if they don’t restructure the loans, everything would collapse,” Rewane added.
The Managing Director/Chief Executive Officer of First Bank of Nigeria Limited, Dr. Adesola Kazeem Adeduntan, in an interview with THISDAY last week, pointed out that the power sector is important to the economy, saying that without the country resolving all the issues around the sector, it might make the country’s push for economic growth to remain a mirage.
“What we have seen is that given the significance of the sector on the overall health of the economy, government has been heavily involved in resolving all the issues in that sector and I am certain that we would find a win-win situation for everybody.
“Again, it is in the overall interest of the economy for that sector to do well. For that sector to do well, there must be capital injection either by way of equity or by way of debt,” he added.
The Central Bank of Nigeria (CBN), last May, disbursed N55,456,161,481 from its Nigerian Electricity Market Stabilisation Facility (NEMSF) to firms in the power sector.
A breakdown of the amount showed that the distribution companies got N8,670,234,863.76, the generating companies – N35,834,536,939, gas suppliers – N10,491,710,788.66, and service providers in the power value chain – N459,678,889.55.
The amount was the fourth batch from the N213 billion stabilisation that was designed by the central bank as part of development finance intervention in the economy.
The central bank also last week directed commercial banks to review and make adequate provisioning for all delinquent foreign currency-denominated loans in line with the July 1, 2010 Prudential Guidelines for Deposit Money Banks in Nigeria.