The move to establish a specialised company to acquire Nigerian banks’ non-performing loans (NPLs) will, if successful, ease mounting asset-quality problems, Fitch Ratings said tuesday.
THISDAY reported on Monday that recent reports suggested that the Central Bank of Nigeria and Nigeria Deposit Insurance Corporation had set up a committee to discuss the plan of setting up another ‘bad bank’ ahead of the expiration of the terminal life of the Asset Management Corporation of Nigeria (AMCON).
NPLs in the sector are increasing rapidly as it reached 11.7 per cent of gross loans at end-June 2016 from 5.3 per cent at end-2015. The operating environment for banks is becoming increasingly difficult as recession, weak oil prices and exchange rate pressure combine to make it more difficult for borrowers to service their loans.
The Central Bank of Nigeria (CBN) has allowed banks to speed up the write-off of fully reserved NPLs since July 2016. This was intended to encourage banks to clean up their balance sheets and help them comply with the five per cent NPL/total loans ratio the central bank uses as guidance for the banks.
According to Fitch, “The write-off measures have little impact on our assessment of a bank’s asset quality because we take a view on the adequacy of a bank’s loan loss reserves and consider its NPLs less loan loss reserves in our assessment of loan quality.
“Fitch-rated Nigerian banks’ NPLs at end-June 2016 were reserved at 62 per cent and our ratings already factor in an assessment of loan loss cover adequacy. Setting up an ‘AMCON 2’ to acquire NPLs would in our view be a more significant and credit-positive measure. If successful, and depending on transfer pricing agreed, it could result in real improvement in the banking sector’s asset quality.”
Fitch listed sectors experiencing difficulties to include oil and gas, utilities, manufacturing and trading.
“AMCON 2 would follow AMCON, established in 2010. This company funded by the issuance of federal government zero-coupon bonds, the central bank, and later by a levy on banks’ assets, removed NPLs from the banking sector, making banks better positioned to lend to the real economy.
“AMCON continues to operate, having recovered 56 per cent of the value of total loans acquired from the banks. It also acquired failed banks and stakes in failed banks. Funding of AMCON2 might prove difficult. Press reports suggest that the government intends it should be funded by the private sector, but convincing private investors to acquire NPLs at a time of heightened economic difficulty might prove challenging,” it added.