Despite Economic Challenges, NPLs of Most Major Banks Still below 5%, Say Analysts


Kunle Aderinokun

FBN Quest Limited, a research and investment banking arm of FBN Holdings Plc, has said despite the macro-economic headwinds, the non-performing loan (NPL) ratios of the large proportion of Nigeria’s major banks are still below 5 per cent and are not expected to exceed 7.5 per cent by the year end of 2016.

As stipulated by the Central Bank of Nigeria (CBN), the threshold for NPL to total loan portfolio ratio is 5 per cent. It implies that any bank, which has its NPL ratio rise beyond the 5 per cent threshold in its book, is bearing such proportion of loans above the threshold as toxic assets or bad loans .

FBN Quest, which revealed this in its Nigerian Banking Sector Update, noted that notwithstanding the challenges in the economy, which has affected the industry, some banks still stood out.

The Nigerian Banking Sector Update, a 40-page report, titled “Nigerian Banks: Weathering the Storm,” extensively analysed nine major banks in the economy, a copy of which was made available to THISDAY. The nine banks covered are Access Bank Plc , United Bank for Africa Plc, Zenith Bank Plc, Diamond Bank Plc , Guaranty Trust Bank Plc, Stanbic IBTC Plc, First City Monument Bank Ltd and Fidelity Bank Plc.

According to the analysts, “First, the banks have been more resilient than the market has been willing to give them credit for. This is particularly true for tier 1 banks. The NPL ratios of the majority of the banks we cover are still below 5 per cent, and for this majority we do not expect the ratio to rise beyond 7.5% in 2016E.”

While acknowledging “some helping hand from the regulator in some respect, allowing banks to restructure some loans,” FBN Quest, however, pointed out that, “ For the tier 1 banks, this relates to a limited proportion of their loan books.”
“The simple fact is that compared with 2009, the obligors are of better quality and the regulatory environment has been more robust; ultimately, risk management processes are generally better,” it explained.

The firm added: “Second, banks have been able to capitalise on the devaluation of the naira, booking significant FX-related gains in the process. While these gains are non-recurring, further devaluation since June implies additional FX-related gains are likely to support Q3 2016 earnings, potentially surprising the market positively. “

Growth-wise, FBN Quest also revealed, “Nigerian banks are experiencing their slowest year since the last crisis (2009).
“H1 2016 headline growth rates are flattering (because of the impact of naira devaluation); however, the underlying growth trends are subdued. Excluding the impact of naira devaluation, risk asset growth is likely to be flattish at best in 2016E. The true trend should be more visible in 2017E – we forecast a 6 per cent average loan growth for seven of the nine banks we cover,” it explained.

The investment banking outfit noted that, “The average ROAE for this group has been trending down since 2012 (21.5%), falling to 14.7 per cent in 2015. On the back of FX-related gains, we expect a marked increase to 20.2% in 2016E but see a return to the previous trend subsequently in 2017E (11.4%), assuming no further FX-related gains. “

Attributing the slowest growth recorded to weak macroeconomic conditions, FBN Quest explained that, “Unlike in previous years when a tighter regulatory environment was mainly to blame for the weaker growth and earnings trends, more recently, the driver has been macro-driven.”

“The consequences of Nigeria’s overreliance on petrodollars are visible now, following the crash in crude oil prices. We expect GDP to contract -1.2 per cent in 2016E, compared with growth of 2.8 per cent in 2015 and 6.2 per cent in 2014. In 2017E, we expect a recovery, with growth of 2.5%,” it noted.

Meanwhile, placing the tier 1 banks and tier 2 banks side by side, FBN Quest pointed out: “Within our coverage, we continue to expect tier 1 banks to outperform their smaller rivals. Although some tier 2 banks are also benefitting from the FX-related gains stemming from naira devaluation in 2016 their underlying earnings are much weaker.”

“In addition, while we expect our coverage universe to show a marked reduction in ROAE after 2017 once the naira devaluation impact is no longer visible, we forecast ROAEs for all our tier 2 banks to remain under 10% in the medium term due to their inherently inefficient operating structures.