07 July 2015, Lagos – Trouble is brewing in Nigeria’s financial sector as uneasy calm pervades the banking system over their huge exposure to energy firms, including oil and gas, and power. Industry regulators and operators alike, are concerned that a large chunk of the about N5 trillion in loans granted to energy firms in the last two years, 2013 and 2014, might be impaired and might likely throw the sector into another round of crisis.
Already, banks non-performing debt profile has risen to more than NN546.02billion as at March 2015, and likely to increase further following the slump in the international oil market. Specifically, the Nigerian Deposit Insurance Corporation, NDIC, has decried the build-up of Non-Performing Loans, saying that these increased from N286.09 billion in 2012 to N354.84 in 2014, and further to N546.02 billion as at March 2015.
NDIC disclosed that its examination of banks in the country showed increased loan concentration in some sectors, such as power, oil and gas, and state governments, many of which owe workers’ salaries for many months.
Also, the Central Bank of Nigeria, CBN, had put the total non-performing loans in the banking sector in 2014 at N440 billion. This amount is more than three times the amount budgeted for the National Assembly in 2015, and also about the same amount budgeted by five states combined in 2015, including Borno N175 billion; Benue N98.54 billion; Zamfara, N92.80 billion; and Ebonyi N80.02 billion.
The NDIC further disclosed that the banking industry total loans and advances stood at N12.63 trillion in 2014, showing an increase of 25.73 per cent over N10.04 trillion granted in 2013. According to the NDIC, the industry’s volume of non-performing loans increased by 10.26 per cent from N321.66 billion in 2013 to N354.84 billion in 2014 and N546.02 billion as at March 2015.
However, it added that the banking industry non-performing loans to total loans ratio improved from 3.20 per cent in 2013 to 2.81 per cent in 2014, and was within the regulatory threshold of five per cent.
Name and shame
Notwithstanding the performance ration, the CBN had directed all banks in the country to publish the names of their delinquent debtors in at least three national newspapers, and banks have already shown their willingness to comply with this directive. Already, some of the banks have stopped lending to oil marketers to import fuel into country, a situation that led to one of the worse fuel scarcity situation ever recorded in Nigeria, lasting for about six months.
In addition to exposing the debtors, the banks on their own have quietly begun disciplining their own staff involved in preparing the loans. While some were redeployed from the energy units, others were not so lucky as they had their appointments terminated. Banks’ exposureSigns that the banks might be in trouble started to emerge as the Annual Reports of the banks show immense exposure to the energy sector while the number of impairments and NPLs are also on the rise.
Data on nine of the listed banks compiled by Sweetcrude, revealed that the banks gave out a total of N4.668 trillion to energy firms in two years, broken down into N2.01 trillion in 2013 and N2.656 trillion in 2014. A breakdown of the banks’ loan portfolio to the energy sector is as followed:
* First Bank Nigeria Plc – N1.47 trillion distributed into N621.43 billion in 2013, and N843.767 billion;
* Guaranty Trust Bank Plc – N715.417 billion: N289.745 billion in 2013, and N425.672 billion in 2014;
* Access Bank Plc – N572.988billion: N243.065 billion in 2013, and N329.923 billion in 2014;
* United Bank for Africa Plc – N548.359billion: N260.479 billion in 2013 and N287.88 billion in 2014;
* Skye Bank Plc – N449.08billion: N209.08 billion in 2013 and N240 billion in 2014;
* First City Monument Bank Plc – N305.307billion: N131.286 billion in 2013 and N174.021 billion in 2014;
* Sterling Bank Plc – N253.33 billion: N145.326 billion in 2013, and N108.004 billion in 2014, and;
* Union Bank Nigeria Plc – N193.6 billion: N77.037 billion in 2013, and N116.56 billion in 2014.
From the above, it can be easily adduced that the higher the exposure, the greater the risk of non-performance, even as majority of the banks had their fingers burnt in the past in their dealings with energy companies. For instance, in the books of First Bank, majority of the loans granted were to oil and gas firms, a development that left it with about N3.198 billion classified as non-performing loans in its 2014 financial statement.
Parts of the non-performing loans included the N2.607 billion facility to Seawolf Oilfield Services; N350.4 million Le Global Oilfield Services Limited; and N241.07 million to Al-Fil Petroleum Company Limited. In case of Sterling Bank, Conoil Plc’s outstanding indebtedness of N15.255 billion, although classified as performing remains a sour point. Indeed, the N19.5 billion advanced to the oil company accounted for about eight per cent of the total facilities granted the energy sector.
At UBA, its exposure to the energy sector was irrespective of its N19.656 billion impairment loss on loans and receivables for the two years, broken down into N13.078 billion in 2013 and N6.578 billion in 2014. The FCMB Group on its part recorded cumulative net impairment loss on financial assets of N18.623 billion, broken down into N10.64 billion in 2014 compared to N7.983 billion in the 2013 financial year.
For Skye Bank, it recorded off balance-sheet engagements in terms of loans granted to Newcross and PPP Fluids totalling N50 million and N233 million respectively.
Insider related loans
As shown in many of the reports, some of the banks discreetly gave out loans without due process to some of their current or former board members and management executives who has interests in some of the energy firms. The Managing Director/Chief Executive Officer, NDIC, Mr. Umaru Ibrahim, had disclosed that its recent examination of 15 banks revealed a breach of insider-related facilities as a percentage of their respective paid-up capital contrary to the provisions of the CBN.
According to him, the CBN in a circular, Ref. No. BSD/09/2004, dated 16th July, 2004, restricted the amount directors or significant shareholders can borrow to 10 per cent of paid up capital. “However, we had a bank whose insider-credit was more than 700 per cent of its paid-up capital,” he said without giving further details.
He therefore reminded the banks of the need to entrench sound risk management practices to forestall a recurrence of the crisis that rocked the country’s financial system a few years back. He said: “One of the serious revelations from the global and local financial crisis has been the widespread failure of risk management. In many cases, risk was not managed on an enterprise basis and not aligned with corporate strategy.
“Boards were in a number of cases ignorant of the risks facing the company. Risk managers were often separated from management and not regarded as an essential part of implementing the company’s strategy. Reflecting the lack of adequate standards, disclosure of foreseeable risks was often poor.”
To guard against another round of crisis, Ibrahim said the NDIC will continue to contribute to the promotion of sound corporate governance in the country’s banking system in line with its mandate. These include deposit guarantee, supervision and distress resolution so as to ensure the safety and soundness of the system.
Also commenting, the Director, Financial Policy and Regulation Department, CBN, Mr. Kevin Amugo, said the apex bank will continue to monitor developments in the sector. As a result, he said banks are required to strengthen their contingency plans and to conduct regular stress tests to mitigate the impact of the crash in oil prices on their balance sheets.
“In light of the above, the CBN, in collaboration with relevant stakeholders, will continue to take appropriate measures designed to ensure sustained financial system stability,” he said. To this end, analysts at CardinalStone Partners advised energy firms to look beyond bank loans and syndicated loans to fund their asset acquisitions and growth.
According to them, as indigenous players in the oil and gas sector move into building infrastructure to supply gas to fertilizer, petrochemicals and power plants, and acquire additional acreage, bank loans become unsustainable due to tenor constraints. “These companies will therefore be looking to the bond market for more patient capital which is suited to their needs and much cheaper. Apart from the bond market, more oil and gas companies would also be looking to the local equity market to raise long-term funding,” they said.
Impact of low oil price
The CBN, in its Financial Stability Report for December 2014 obtained by Sweetcrude, had warned that sustained low oil prices might trigger an increase in Non-Performing Loans, especially as the exposure to the oil and gas sector accounted for 25.70 per cent or N3.24 trillion of the total credits of N12.63
trillion at end-December 2014.
The General Manager, Commercial, Nigeria LNG Limited, Mr. Patrick Olinma, told Sweetcrude that the implications of the low oil price for the petroleum sector are grave, stemming from effects on investment, income, profitability, and development.
He said that energy firms would be faced with reduced revenues, estimated at $10 billion in 2015 against 2014 figure, delayed and/or cancelled projects and final investment decisions, FIDs, with multiplier effect on the overall economy.
He added that energy firms will also have to contend with budget revisions and cut back on expenditure. Others are reduced activities and production, especially as the current price is struggling to support marginal production; slowdown in the indigenisation of the industry and also redundancies and increased unemployment.
Specifically, Olinma warned that like other energy companies, the Nigeria LNG is not immune to the current oil price decline, as the bulk of gas, liquefied natural gas, LNG, and natural gas liquid, NGL sales around the world are still heavily linked to oil prices. The low oil price, he said, “Will translate to reduced prices and revenues, lower arbitrage opportunities (among markets) and concerns on future growth and profitability; gas supply uncertainties with reduced investments in the petroleum sector.
“Increased competition from unconventional gas supply sources and other cheaper fuels such as coal puts further pressure on NLNG’s profitability. Competition from domestic gas and also raise concerns on future expansions.” Also commenting, CBN’s Amugo identified the anticipated sources of risks in the financial system in the first half of 2015. These include declining crude oil prices, due to US shale oil and gas production and the resultant pressure on the Naira exchange rate.
Amugo said: “Others include a reversal of capital flows, owing to improvements in the US economy, and the adverse implications for the capital market; a possible increase in non-performing loans. Others are security challenges in parts of the country; equity market losses that might linger as a result of low investor confidence; uncertainties associated with the 2015 general elections. There will also be upward inflationary pressures from election spending; and an expected increase in electricity tariffs.”
Corroborating, the Vice President, FBN Capital, Ms. Rolake Akinkugbe, had warned that oil and gas firms that borrowed huge amount of money at high interest rates may be forced to relinquish some of their stakes to the banks if they hoped to continue in business. She said: “For Nigerian companies that have taken on significant debt at heavy interest rates, parceling out more equity than envisioned may be necessary to stay afloat. This is particularly relevant for non-producing marginal field operators that have licences on the cusp of being revoked.”
According to her, assets that were purchased during the industry’s up-cycle would be most heavily impact by low oil prices, adding that marginal fields’ operators that are yet to commence production on their fields would be the worst affected. She further warned that oil and gas firms would be faced with a tough operating environment in 2015, due to low oil prices, adding that the primary area that will be most affected by the low prices in the West African value chain would be the exploration business.
Painting a bleak economic picture for the country, PriceWaterhouseCoopers, PWC, warned that the Nigerian economy would be plunged into serious economic and financial crises if crude oil price averaged $45 per barrel in 2015. PWC, in a report titled: ‘What next for Nigeria’s economy? Navigating the rocky road ahead,’ stated that government revenue will decline drastically, and risked being plunged into another financial crisis in the scenario of crude oil price falling to $35 per barrel and averaging $45 per barrel in 2015.
It further stated that in a situation where the low crude oil price persists, Nigeria’s crude oil production would fall by 15 per cent through bunkering and other supply disruptions, adding that gross oil revenues would fall to a third of their 2013 level.
PWC said, “As price and production projections disappoint, government oil revenues fall to levels not seen since 2003. Taxes become difficult to collect as some parts of the country become unreachable. Combined with difficulties administering tax collection from unstable parts of the country, we would expect the federal government to fall over three months behind on paying employee wages and government bond yields on dollar debt could approach 20 per cent.
“Pressure on the banking sector mounts as loans to state government and the oil and gas sector default. This sees non-performing loans rise to the 25 per cent-30 per cent levels seen during the 2008-2009 banking crisis.”
“The Central Bank of Nigeria, CBN, becomes the last fully-functioning public institution. It is forced into a severe devaluation of 70-80 per cent as the majority of planned Foreign Direct Investment, FDI, projects are cancelled and capital outflows accelerate as some foreign multinationals start to wind down local operations.” Many of these predictions are now a reality and weighing down heavily on Nigeria’s economy, even as it is reputed as the fasted growing in Africa.
*Michael Eboh – Vanguard