Bad-debt, again, casts shadow over banks’ earnings

As the latest earnings season gets underway, speculation is, once again, growing that the persistent bad loans crisis in the banking industry may affect lenders’ performance. TONY CHUKWUNYEM writes


With several of the nation’s top lenders deeply involved debt crisis, there is little doubt that the Etisalat Nigeria crisis is set to overshadow banks’ second-quarter results season, which kicks off this month.
Indeed, a Reuters report last Thursday stated that the crisis at Etisalat, which forced the regulatory bodies-Central Bank of Nigeria (CBN) and the Nigerian Communications Commission (NCC)-to rescue the telecoms firm, has put the country’s lenders in a dilemma as they prepare for half-year results due this month.

The telecoms firm, which last Thursday changed its name to 9mobile after Abu Dhabi’s Etisalat terminated its management agreement with its Nigerian arm and gave the business three weeks to phase out the brand in Nigeria, took-out a $1.2 billion loan four years ago from 13 local lenders to refinance an existing debt and expand its mobile network.
It, however, failed to keep up with repayments of the debt, triggering attempts (thwarted by the CBN and NCC) by the banks to place it in receivership. The intervention by the apex bank resulted in a new board and management being named for the company.
Banks involved in the loan deal include: Zenith Bank, GT Bank, First Bank, UBA, Fidelity Bank, Access Bank, Ecobank, FCMB, Stanbic IBTC Bank and Union Bank.

GT Bank with $138 million in outstanding loans and Access Bank with $131 million are among the most exposed to Etisalat Nigeria.
According to the news agency, the lenders are in a quandary as they prepare their second quarter results, because they first wanted to determine Etisalat Nigeria’s free cash flow to help them value the telecoms business before deciding on whether to impair the assets or hold on to find new investors.

It quoted a source as saying : “No bank is talking about restructuring now, but it might get to that later once we are able to ascertain the true value of the company. We think that by the time the new management settles in, makes some changes and reduces costs, the company might bounce back.”

Although the report stated that banks may not start making provision for the bad debt until the next quarter, it quoted head of research at Vetiva Capital, Olalekan Olabode, as saying : “Given the understanding that Etisalat’s debt was performing till the end of the first quarter, we believe the banks … might be required to make provisions in the second quarter.”

‘Manageable impact’
Interestingly, however, frontier and emerging markets investment firm, Exotix Capital, believes that the impact of the debt on the lenders is ‘’manageable.”

In a note obtained by New Telegraph, analysts at the firm stated: “We estimate a modest impact on banks. At a headline level, loans to Etisalat Nigeria represent 1.9per cent of aggregate bank loans. Likewise on our sensitivity analysis, the Etisalat loans would on average have a -12per cent, -2per cent and -0.3bp impact on our FY17f net profit, equity and capital adequacy ratios for the banks, respectively. We believe the banks should easily be able to absorb a shock of this magnitude.”

But they pointed out that if the development was seen in the context that it is a precursor to more general difficulties in foreign currency loan exposure, “which represents on average 47per cent of the total loan book, then we may see a more pronounced deterioration in the equity base of banks.”

Risks persist in banks
In fact, even if the impact of the Etisalat Nigeria debt on the banks turns out to be “manageable” the second quarter results of the lenders, according to international rating agency, Fitch Ratings, may not be as good as what they reported for the first quarter due to what the agency described as significant risks that persist in the industry.

In a report released in May, entitled, “Nigerian banks post good results but risks persist,” Fitch stated: “Nigerian banks posted good financial results for 2016, despite turbulent operating conditions, but Fitch Ratings believes that significant financial risks persist beyond reported figures. The banks’ healthy 2016 net income was lifted by large one-off revaluation gains after Nigeria allowed its currency to devalue in June.
“The banks also made higher US dollar core income (in naira terms) and booked sizeable Foreign-Currency (FC) trading income, which offset rising impairment charges. While the banks’ performance ratios improved in the year, we note that a substantial part of earnings were non-recurring and will be difficult to repeat,” the agency stated.

Similarly, around the same period, another global rating agency, Moody’s Investors Service, released a report, entitled, “Banking System Outlook: Nigeria,” in which it stated that although it was maintaining its stable outlook on the Nigerian banking system, reflecting the rating agency’s view that acute foreign-currency shortages will gradually ease, loan risks will remain high.

Vice President and Senior Analyst at Moody’s, Akin Majekodunmi, said: “With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our outlook period. However, we expect asset quality to worsen slightly over the outlook period, as historically low oil prices, currency depreciation and economic contraction experienced in 2016 continue to generate new nonperforming loans in 2017.”

Besides, he said: “Risks to asset quality are likely to remain high, with Non-Performing Loans (NPLs) likely to rise to between 14-16 per cent from 14 per cent at end-2016. They should, however, reach a peak as write-offs, loan restructurings, and the strengthening economy takes effect. Nigerian banks should have sufficient capital to absorb expected losses, though Moody’s expects system-wide Tangible Common Equity (TCE) to only decline slightly to 14.1 per cent of adjusted risk-weighted assets by year-end 2018 from 14.7 per cent at the end of 2016. The slight shift is primarily due to increased loan-loss provisions and the effect of further expected naira depreciation on the balance of risk-weighted assets denominated in foreign currency.”

Majekodunmi also stated that Moody’s anticipates banks’ loan-loss provisioning weakening their net profitability, adding that it expects return on assets to decline to around one per cent in 2017 from 1.3 per cent at the end of 2016 on account of high provisioning costs at around three per cent of gross loans.

“System-wide pre-provision income will likely remain robust, however, at around 4 per cent of average total assets, supported by high yields on government securities and profits on open foreign currency positions,” the agency stated.

MPC member’s concern
But perhaps, even more significant is the concern expressed about banks’ rising NPLs by a member of the CBN’s Monetary Policy Committee (MPC), Professor Dahiru Hassan Balami.

According to personal statements of MPC members at the committee’s May meeting recently released by the CBN, Balami stated: “At the domestic level, the banking sector level of resilience is becoming weaker as shown by the stress tests result. The May 2017 MPC meeting met a deteriorating situation of the Nigerian financial sector. The result of the stress tests showed that capital adequacy ratio had deteriorated from 13.6per cent in February to 12.81per cent in April, which is below the prudential requirement of 15per cent for banks with international authorisation.

“The NPLs have also risen to 15.18per cent from 13.59 per cent in February 2017, which is far above the prudential limit of 5per cent. The liquidity ratio has also registered a decline from 46.61per cent to 44.60 per cent. When compared with the prudential limits of 30 per cent, it can be seen that the interbank market has not been active, reflecting the fact that banks have not been trading among themselves, which is not a desirable situation,” he added.

Noting that some of the banks were making use of the Standing Lending Facility (SLF), which is usually meant for weaker lenders, he revealed : “the three previous outlier banks have now become four.”
The MPC member pointed out that even though banks are still making profit despite the bad ratios, they would be making lower levels of profit, “if adjustments are made for foreign exchange.”

Last line
Indeed, although banks generally posted good first quarter earnings for the first quarter of the year, the consensus among analysts last weekend was that bad loans continue to be a major risk for lenders. Financial analyst and Principal Consultant at Henates & Associates, Henry Atenaga, said: “Bad loans are really making things tough for banks. The ones that are likely to do well are those that will make money from other income. Other income is income that does not come from their normal business operations.”


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