Banks’ Impairment Charges Soar by N46.5bn over COVID-19

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Goddy Egene

The impairment charges for risk assets of the six leading banks jumped by N46.542 billion or 102 per cent in the first (H1) of the year ended June 30 as they increased provisions for loan losses to cover the impact of the COVID-19 pandemic on their operations.

In the 2019 full year, impairment charges by the leading lenders had declined significantly as a result of improved risk management and recovery strategies.

Although some of the banks recorded an increase, while others recorded a decline in the first-quarter (Q1) of 2020, all the top banks have witnessed a significant jump in impairment charges at the end of the first half of 2020 due to the negative impact of COVID-19.

Access Bank Plc, FBN Holdings Plc, Guaranty Trust Bank Plc, Stanbic IBTC Holdings, United Bank for Africa Plc and Zenith Bank Plc, which recorded total impairment charges of N45.476 billion in the first half of 2019, ended the first half of 2020 with charges of N92.018 billion, indicating an increase of N46.542 billion or 102 per cent.

A breakdown showed that Stanbic IBTC, which recorded a recovery of N557 million in 2019, made a provision of N6. 4 billion in 2020.
The impairment charges of Access Bank Plc soared by 237 per cent from N4.88 billion to N16.47 billion, while that of GTBank Plc rose by 209 per cent from N2.186 billion in 2019 to N6.77 billion in 2020.

UBA Plc made a provision of N3.12 billion in 2019, but has to increase it by 150 per cent to N7.807 billion in 2020.
Zenith Bank Plc recorded impairment charges of N23.92 billion in 2020, indicating a jump of 74.2 per cent compared to N13.74 billion in 2019. FBN Holdings Plc provided N30.651 billion, up from N22.107 billion in 2019.

While the impairment charges do not mean outright losses, financial research analysts said the banks are raising their provisions so as to adequately cover the impact of COVID-19 on businesses.
In view of the impact of COVID-19 on the businesses and the banking sector particularly, Cordros Research had said it expected the cost of risk across the industry to spike by 2021 full year (FY) and non-performing loan (NPL) moderation to temper as well following an initial dip that would follow the significant loan growth.

“Notwithstanding, NPLs are expected to spike in the event of any stress to the system, which could easily cascade into wider systemic frailty. On the whole, we remain negative on the banking sector, especially as asset quality is expected to have come under pressure during the pandemic,” it said.

In their comments on the outlook for the year, analysts at United Capital Research, said while the appetite for loan growth had been muted in the past due to tighter operating environment, recent regulatory pronouncements would compel the banks to do more.
“In 2020, we expect banks to be more aggressive at growing their loan books. When considered in the context of the banks that were penalised in September 19, the 65 per cent regulatory LDR guideline has more implications for the Tier-1 banks as well as many of the international banks. They are more liquid and better capitalised, but broadly less aggressive compared to their smaller counterparts whose LDR currently run ahead of the regulatory minimum.”

They had explained that they expect a more aggressive lending drive by the larger banks in 2020, noting that this implies that fixed term deposit rates would be low as the banks move to optimise deposit growth to meet the required LDR.

“To aggressively grow their loan books, we expect the banks to strengthen their risk management framework to support credit origination. Beyond regulation, CBN’s expansionary stance, which is expected to keep the yield environment low, will also propel banks to seek out outlets for funds, especially in riskier assets to optimise earnings yield.

“Notably, the observed improvement in industry NPL, which moderated to a four-year low of 6.7 per cent in Q3-19, gives the impression that the default rate is moderating. Hence, the bank should be more willing to expand their loan books. The above notwithstanding, we do not expect loan growth to revert to the 2012-2015 levels, given that banks will be more cautious in their credit origination and deployment going forward,” they said.