Banks’ exposure to oil sector raises concern

10 June 2015, Lagos – Despite assurances by some deposit money banks (DMBs) that their exposure to the oil and gas sector will not affect their performances, financial market analysts have expressed asset-quality concerns about some of the loans to the sector.

Central Bank of Nigeria, CBN.

Central Bank of Nigeria head office, Abuja

Specifically, analysts at Renaissance Capital, a financial advisory firm, in a report titled: “Nigerian Banks: Where is the bottom?” obtained by THISDAY, highlighted Atlantic Energy’s about $500 million indebtedness to FBN Holdings and Skye Bank Plc.

The firm pointed out that the loan “stands out,” even as it stressed the need to watch how it evolves in the near-to-medium term.

According to RenCap, the clean-up of the downstream sector and how the outstanding fuel subsidies of N200-N300 billion is resolved, as well as regulatory/policy changes, which could negatively affect some corporates, are also potential drivers of non-performing loans (NPLs) in the sector.
“In gauging the asset-quality stress in the system and relative strengths of the banks through this rough patch, we establish each bank’s breakeven cost of risk and calculate what we call a ‘pain buffer,’ which estimates how much room we think the bank has to take on additional impairments before moving into a loss. Based on our 2015 estimates, GTBank, Stanbic, Zenith and UBA have the highest pain buffers in the sector,” it added.
Although implementation of the policy has since been deferred to ensure that the on-going implementation of the Basel II/III capital adequacy framework is not dislocated, the Central Bank of Nigeria (CBN), had stated in an earlier circular dated December 10, 2014, that where exposure to the oil and gas sector (as defined by the International Standard Industrial Classification of Economic Sectors as Issued by the CBN), was in excess of 20 per cent of total credit facilities of a bank, the risk weight of the entire portfolio in such facilities would attract a risk weight of 125 per cent for the purpose of capital adequacy computation.

In addition, banks were then directed to prepare and forward to the central bank their computation and results of their single-factor sensitivity stress test. The single-factor sensitivity testing is a form of stress test that usually involves an incremental change in a risk factor, holding other factors constant.
Continuing, the investment and research firm in the report, also noted that with much talk about the federal government reforming the economy, in a weaker macro and fiscal environment, it would be unlikely that the banking sector would remain unscathed by some of the changes that could occur.
It predicted that the top on the list would be the possibility of a removal/ adjustment to the tax exemptions on interest earned on government and corporate securities.
“We think this is low-hanging fruit for the government and, as with Ghanaian banks’ experience, with taxes increased in 2013 to shore up revenue (i.e. national stabilisation levy – 5% of profit befoe tax, Value Added Tax on financial services, etc.), we think the new Nigerian government could tighten tax rules on its banks.
“We have sensitised our full-year 2015 return-on-equity estimates and conclude that, should the tax rate for banks materially increase, the investment case for the sector would be weakened so significantly that almost no bank would be able to match its cost of equity in the already-tight monetary policy environment,” it added.
A year ago, the firm had predicted that 2015 potentially held green shoots of recovery for Nigerian banks. Then, analysts at RenCap were cognisant of the tough operating environment in which the banks operate, exacerbated by an onslaught of regulatory headwinds since 2013.
“We were looking for an easing in the cash reserve requirements and a more market-friendly regulatory environment. However, the subsequent decline in oil prices has brought all this to naught, and halfway through 2015, we are still finding the bottom for Nigerian banks.
“Monetary policy and other CBN regulations have become tighter as the CBN has sought to defend the naira, squeezing already fragile banks’ earnings even more,” it added.

– This Day

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