Nigeria’s foremost research house and rating institution, Agusto & Co. Limited, has released its flagship 2020 Banking Industry Report, which is the most current and comprehensive report in the banking industry in Nigeria.
According to the report issued recently, approximately 23 per cent of the industry’s gross loans and advances were classified in the stage two category as at 31 December 2019, according to the International Financial Reporting Standard (IFRS) nine.
“As at the same date, four out of the 24 banks covered in the report had stage two loans to gross loans ratios above the 23 per cent industry’s average,” the report stated.
Agusto & Co, however, believes that the volume of stage two loans is a threat to the industry’s asset quality and future profitability. Stage two loans primarily comprise exposures with an increase in the associated credit risk compared to when the loan was disbursed.
The institution further noted that the COVID-19 pandemic with its impact on businesses elicited an increase in the volume of stage two loans, adding that stage two loans are susceptible to adverse migrations in the face of a prolonged macroeconomic downturn.
Following the forbearance granted by the Central Bank of Nigeria (CBN) in March 2020, permitting banks to restructure loans to businesses that have been adversely impacted by the novel COVID-19 pandemic, Agusto & Co highlighted that the banking industry had restructured over ₦7.8 trillion (almost half) of the loan portfolio as at June this year, according to the CBN.
While the forbearance is expected to keep the Industry’s impaired loan ratio, which stood at 7.6% as at 31 December 2019, at bay in the short term, it says it is concerned about the performance of these affected loans, given that the coronavirus pandemic is yet to be curtailed and a second wave may be looming. A further slowdown in economic activities and a total lockdown may worsen an already bad situation.
The Nigerian economy is projected to shrink by 8.9 per cent (worst case) and 4.4 per cent (best case) in 2020, according to the Ministry of Finance, resulting in a probable recession. “In our worst-case scenario, Agusto & Co. projects a 6% GDP contraction in 2020”.
“While we acknowledge a likely extension of the forbearance period in the event that the pandemic lingers, we expect a rise in the impaired loan ratio of the banking industry in the medium term. Our expectations are also driven by the regulatory-induced growth in the loan book driven by the minimum loan-to-deposit ratio (LDR) policy, with sanctions banks for non-compliance through additional CRR debits.”
Agusto & Co opined that banks should not be forced to lend as this may encourage weaker risk management practices. Furthermore, the foreign currency component of these restructured loans, largely in the oil and gas and power sectors bloat the exposures in the likely event of a further devaluation of the domestic currency.
According to the report, the banking Industry’s stage two loans also threaten the sustainability of its earnings if additional provisions are required in the event of a migration to the stage three category and subsequent write off occur.
The release read in part: “As at 31 December 2019, provisions made on stage two loans in line with IFRS 9 as a percentage of total stage two loans stood at a low seven per cent while stage three loans had a coverage ratio of 48 per cent. Following the 2016 recession, the banking industry had written off loans of over N1.9 trillion of its loan portfolio as at FYE 2019, with severe implications on capital.