A Review of the Nigerian Energy Industry

Systemic crisis looms in banking sector

22 September 2014, Lagos – There are indications that some banks are not making adequate provisions for bad and doubtful loans in their books as mandated by the Central Bank of Nigeria, CBN.

This, it is feared, may trigger another systemic crisis in the banking sector if not checked. It will be recalled that it was as a result of huge non-performing loans in the Nigerian banking sector that led to the CBN intervention in five banks in 2009.

Banks are supposed to make adequate provisions for non- performing loans from their shareholders’ funds in order to avert the kind of situation which led to financial crisis in 2009.

Central Bank of NigeriaInvestigations have shown that banks’ bad debts are beginning to grow again in the banking sector following the outcry from the recently privatised firms in the Power sector of their inability to service the loans they obtained from the financial institutions which have grown to over N250 billion

Meanwhile, the Asset Management Corporation of Nigeria, AMCON has said that it will no longer buy any bad debt from any bank.

According AMCON spokesman, Mr. Kayode Lambo, “AMCON is no longer buying NPLs and we have been repeating that. The CBN is the only institution that can say we should buy.” Commenting further, he said: “If it is true that some banks’ non-performing loans are accumulating, then they should make provisions for such or sell such NPLs to someone else, not AMCON.”

Reacting on the development, some operators in the Nigerian capital market who preferred to remain anonymous said: “It is time for the regulators to beam their searchlights on these banks.

The financial statement of banks should be thoroughly examined. How can operators in the recently privatised power sector not be able to pay the loan they took from the banks, given the arbitrary charges and huge returns they make from low power supply?

The banks that gave loans to these companies should ensure that appropriate provisions are made as mandated by the CBN, otherwise, we shall begin to see another sign of distress in the sector.”

It will be recalled that the Bankers Committee recently said it would help the privatised power firms clear N25 billion PHCN legacy debts to gas- producing companies.

Also speaking on the development, Managing Director/Chief Executive, Afrinvest Plc, Mr. Ike Chioke during his presentation of the Afrinvest Nigeria Banking Sector Report in Lagos, noted that there is a growing pile of troubling power assets in the banking industry, while the capacity of the CBN to pursue another bailout in the event of a banking crisis is doubtful.

According to him: “If there is a problem in the power sector and they are not able to service these loans, there is essentially going to be a problem in the banking sector. And if there is a problem, the balance sheet of CBN may not be able to accommodate another bailout.”

The report stated: “The highly applauded power sector privatisation programme of the Federal Government in 2013 may begin to reveal structural and financial challenges in the near term if not well managed.

Approximately $2.5 billion was raised by the BPE in 2013 from the privatisation of PHCN’s generating (GENCOs) and distribution (DISCOs) companies. Another $5.7 billion is expected to be raised by the Federal Government from this year’s sale of the NIPP plants.

A significant portion of the funding for the acquisition of these assets by private sector investors was provided by Nigerian banks with minimal equity contributions. This has absorbed an enormous level of funds from banks. This investment is, however, supposedly yet to yield returns and has in part led to the rush for Eurobonds by banks in 2014 in an attempt to restructure credit to the Power sector.

A major apprehension is the currency mismatch as cash flows from power assets are generated in naira.

More worrisome, however, is that many of the GENCOS and DISCOS earn significantly less than their projected cash flows prior to acquisition due to government’s inability to resolve tariff and gas supply challenges. Cumulatively, the apex bank should keep a close watch on banks’ risk assets to the power space in order to avoid the emergence of another era of toxic assets.

“Our review of the CBN’s balance sheet as at November 2013 raises crucial questions that require urgent attention. The CBN’s proactive response to the 2008/2009 banking crisis was arguably the right move although this has, in itself, magnified CBN’s level of indebtedness.

Over 40.0 per cent of CBN’s asset portfolio is unmarketable, comprising principally of AMCON bonds, intervention funds and development finance loans.

These are long-term investments without a discernible exit time frame other than the eventual performance of the loan portfolio. For instance, the 190.5 per cent surge in other liabilities from N2.1 trillion in December 2009 to N6.1 trillion in November 2013, traceable to the acquisition of AMCON’s debt by the CBN, is alarming.

In the event of another crisis in the banking space, the CBN may not have the capacity to bail out the banks without avoiding the option of printing money, which will have significant consequences on price stability.

As such, we believe the CBN may be forced to raise the AMCON levy on banks from the current 0.5 per cent of total assets plus 0.5 per cent of 33.0 per cent of off-balance sheet items in the coming years,” Chioke emphasised.
*Peter Egwuatu – Vanguard

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