Oil price fall: Nigerian banks at risk

*Analysts say banks may lose capital base
*Price slump may wreck financial sector

Ike Amos 23 December 2014, Sweetcrude, Lagos – A number of banks in Nigeria are in danger of losing their capital base due to the current slump in international oil prices, according to analysts at Afrinvest , a leading investment banking firm.


Godwin Emefieli, CBN Governor

Godwin Emefiele, CBN Governor

Raising the alarm of an impending doom in the nation’s financial system in a report titled, ‘Recalibrating Market Sentiment: Macro and market resilience,’ the analysts said the development may also wreck the entire financial system.
“In light of the incessant decline in crude oil prices, we have reviewed the exposure of some Nigerian banks to the oil and gas sector as a proportion of the total loan portfolio and Shareholders’ Funds (SHF) as at Financial Year 2013,” the report said.
It pointed out that the situation that led to the crisis in the banking sector in 2008 was currently prevalent in the sector and that if not arrested immediately, this was capable of wrecking the financial sector and the economy in general.
Particularly, the report disclosed that Sterling Bank Plc, with the highest ratio of oil sector loans versus total loan portfolio, was more at risk than all the banks combined.
It added: “Looking back, the 2008 banking crisis can be linked to the sharp decline in oil prices, resulting in the sudden accumulation of huge toxic assets, which wiped out banks’ capital.
“As observed in the ratio of oil sector loans versus total loan portfolio of the banks, some banks may have begun to tread that same path with huge exposure to the oil and gas sector relative to SHF.
“For instance, Sterling recorded the highest with loans to the oil and gas sector at 1.5 times to its shareholders’ fund. Crisis in the oil and gas space could easily wipe out its profit for the year and shareholders’ fund.
“The banks capacity to grow risk assets without a corresponding increase in contributory capital is limited. This is premised on the 100 per cent weighting applied to loans in the computation of Capital Adequacy Ratio (CAR).”
Giving a general analysis of the ratio of oil sector loans versus total loan portfolio for the entire banking system, the analysts disclosed that Sterling Bank Plc also recorded the highest with 31 per cent, followed by Guaranty Trust Bank Plc with 28.7 per cent, while Access Bank Plc recorded 28.3 per cent.
Also, First Bank Nigeria Holdings, FBN, recorded oil loans versus total loan portfolio ration of 28.3 per cent, Union Bank Nigeria – 27.6 per cent, Diamond Bank Plc – 21.8 per cent, First City Monument bank Plc – 20.8 per cent, Zenith Bank Plc – 15.5 per cent, Fidelity Bank Plc – 14.7 per cent and Stanbic IBTC bank Plc – 14.5 per cent.
Furthermore, giving a ratio of oil sector loans versus shareholders’ funds of the banks, Sterling Bank, according to the analysts, recorded 157.1 per cent, FBN Holdings – 131.7 per cent, Diamond Bank – 128.8 per cent, and Access Bank – 93.9 per cent.
Others are Guaranty Trust Bank, 87.2 per cent; First City Monument Bank – 65.1 per cent, Stanbic IBTC – 56.9 per cent, Fidelity Bank – 45.5 per cent, Zenith Bank – 38.4 per cent and Union Bank Nigeria – 31.8 per cent.
To avert a crisis situation in the financial sector, the analysts advised that the Central Bank of Nigeria, CBN, should base the maximum sector exposure of each bank to its shareholders’ fund, rather than total loan portfolio.

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