Can Nigerian banks withstand the energy slump?

26 August 2015, Lagos – As Nigerian oil & gas and power firms grapple with mounting debts on account of the slump in the price of crude oil and the challenging electricity environment, Ejiofor Alike and Obinna Chima review the multibillion dollar exposure of commercial banks to the energy sector and the financial health of the banking system

Godwin Emefiele.CBNDespite the attempt by commercial banks to downplay their exposure to the oil and gas and power sector, insisting that it will not affect their performance, the sustained decline in crude oil prices as well as the low level of revenue recorded by some power firms have heightened asset quality concerns about some of the loans to the energy sector.

Brent crude price, the international benchmark, fell to a six-year low of $45.10 per barrel last week and there are strong projections that crude prices might remain soft in the medium term. The latest slide in crude prices came after data showed an increase in the number of rigs drilling for oil in the United States.

The resilience of the US shale industry has prolonged an oil glut that has sent the energy sector into turmoil, as many see low prices persisting for months if not years.

The situation in the oil market has put the operations of some oil firms into jeopardy and remains a threat to the huge sums that had been lent to the sector by banks. For instance, United Kingdom-listed, Africa-focused Afren Plc has gone into administration. According to Afren documents, Nigerian banks have at least $185 million principal exposure to Afren.

Zenith has $100 million to Oil Mining Lease (OML26), $5 million to Ebok; Access Bank has $50 million to Okwok/OML113 (Aje), $5 million to Ebok; and Stanbic has $25 million to Ebok.

On the back of this, analysts at Renaissance Capital Limited (RenCap) viewed the banks’ exposures “to Afren cautiously as the administrative proceedings take shape”.

“Furthermore, we think it is conservative to assume that oil field disposals following the sharp and elongated decline in oil prices may be protracted. Ideally, we would like to see, at the barest minimum, the banks classifying their exposures to Ebok, while raising collective impairments on other exposures. That said, we note the following:

“Stanbic has been proactive, classifying its Ebok exposure as an NPL and providing at least 30 per cent ($8 million) for it in first quarter 2015. We believe the additional provisions required have been factored into the bank’s 2.5 per cent cost of risk (CoR) guidance for 2015.

“According to Zenith management, it has classified its $5 million exposure to Afren and made 100 per cent provision. We do not think the $100 million loan to OML26 has been classified or provided for. We expect Access Bank to write off its $5 million exposure to Ebok.

“We highlight that if Zenith and Access fully provide for their gross Afren exposures (Ebok and others inclusive), this would imply a doubling of our full year 2015 estimated CoR for Zenith to 2.2 per cent, from one per cent, and raises Access’s by 90 basis points to 2.4 per cent, from 1.5 per cent, reducing our full year 2015 estimated profit before tax by 15 per cent and 21 per cent, respectively,” RenCap stated in a report titled: “Nigerian banks- Afren: The good, the bad and the ugly,” obtained at the weekend.

But some industry watchers have argued that Afren is a symptomatic problem in the banking industry that is not being addressed.

They noted that when oil prices were over $100 per barrel, Nigerian lenders lent massively to local firms during their acquisition spree of oil assets from the international oil companies (IOCs).

However, oil prices have since crashed, making it impossible for the Nigerian independents to meet their debt obligations, and could usher in a wave of industry consolidations for the companies to survive. The effects of the sustained low oil prices has also forced a lot of firms to scale down their investment, even as rig count has dropped and most firms in the sector have also sacked some of their workforce. In fact, a worker in one of the oil service companies disclosed to THISDAY that more than 20,000 employees have lost their jobs from all the major international oil and gas companies because there are no maintenance jobs going on apart from leaks or minor pipeline repairs.

Nonetheless, while banks continue to explore ways to cut down their looming losses from lending to the upstream oil and gas sector, another concern for them is their huge lending to the power sector. Nigerian commercial banks were also very active in financing the acquisition of the power assets. In fact, most of the tier-1 banks gave significant loans to the power sector during the process. The loans to the power sector typically had a grace period on either interest payments or capital repayments (if applicable), or both, of up to two years. But THISDAY findings showed that some of the operators are encountering challenges meeting the repayment terms. Also, experts maintain that it would be unlikely that the banking sector would be unscathed by their lending to these sectors.

Energy Sector Loans

Though the figures for 2010-2015 were not immediately available, the 2014 full year results of some of the banks showed that a significant fraction of their loan books went to both oil and gas and power sector lending, of which most of the commitments were to the upstream oil and gas operators.

For instance, United Bank for Africa Plc’s audited results for 2014 showed that while the bank gave out N170.903 billion to the oil and gas sector in the year, higher than the N154.549 billion in 2013, its lending to the power sector also climbed to N83.601 billion in 2014, from N60.970 billion the previous year.

Also, First City Monument Bank’s full year results for 2014 revealed that while N149 billion loans was given by the bank to the oil and gas sector, higher than the N104 billion it did in 2013, its lending to the power and energy sector in the year was N25 billion , lower than N27 billion recorded in 2013.

THISDAY’s checks also showed that while Fidelity Bank Plc’s granted a total of N135 billion loans to the oil and gas sector, lending to the power sector gulped N58 billion in the bank’s loan book.

Similarly, a breakdown of Skye Bank Plc’s lending to the sectors showed that while it lent N19.358 billion to the power sector in 2014, oil and gas upstream –N120.678 billion, oil and gas engineer – N79.456 billion and oil and gas downstream – N21.304 billion. But financial market analysts had expressed concern about Skye Bank’s $100 million loan to Atlantic Energy. In the same vein, Sterling Bank full year results for 2014 showed that while the bank increased its lending to the oil and gas sector to N131.583 billion last year, from N99.733 billion the previous year, the bank committed N13.743 billion as loans to the power sector.

Also, FBN Holdings Plc’s results reflected a total of N853 billion to the oil and gas sector, while Union Bank Plc granted a total of N93.5 billion and N23 billion to the oil and gas and power sectors respectively. Similarly, Diamond Bank gave out a total of N198 billion and N50.8 billion to the oil and gas and power sectors respectively.

The total exposure of the banking system in these asset acquisitions between 2010 and 2015 runs into multi-billion dollars, according to THISDAY’s findings and the slump in oil prices has weakened the capacity of the operators to service these debts.

String of Acquisitions

Local and international investors, which participated in the string of acquisitions in the oil and gas sector between 2010 and 2015, as well as the take over of assets created from the defunct Power Holding Company of Nigeria (PHCN), raised over $11.6 billion from the banks to acquire these assets. The investors staked about $2.929 billion to acquire the assets of the PHCN under the federal government’s privatisation programme.

Though the value of the acquisitions in the oil and gas sector was worth about $8.717 billion, Wood Mackenzie estimated the financial involvement of indigenous companies at $7.5 billion. Wood Mackenzie said in its latest report that over the last five years, the growth of indigenous companies has been underpinned by the acquisition of assets from the IOCs.

Shell Petroleum Development Company (SPDC) in 2010 opened the floodgates of assets sale by the IOCs when it announced the transfer of its 30 per cent interest in Oil Mining Leases (OMLs) 4, 38 and 41 to Seplat Petroleum Development Company. Total with 10 per cent and Eni with five per cent subsequently sold their stakes in the three leases to Seplat, thus raising the operator’s equity to 45 per cent, while NNPC retained 55 per cent, which it later transferred to its producing arm, the Nigerian Petroleum Development Company (NPDC).

In 2011, Neconde Energy paid $585 million to Shell, Total and Eni to acquire their 45 per cent stake in OML. Shoreline Energy Resources paid $850 million to Shell and its partners for their 45 per cent stake in OML 30; Eland Oil paid $154 million for Shell, Total and Eni’s 45 per cent stake in OML 40; ND Western paid $600 million for OML 34; while First Hydrocarbon Nigeria, partly owned by Afren paid $98 million to acquire Shell’s 30 per cent interest in OML 26.

Also First E & P paid $300 million to Shell and partners for 45 per cent stake in OML 71 and 72. Under the latest divestment by Shell, Total and Agip, Erotron Consortium paid $1.2 billion for 45 per cent stake in OML 18; Pan Ocean paid $900 million for OML 24; while Creststar Consortium paid initial deposit of $100 million of the $500 million bid price for OML 25 before the NNPC came forward to exercise its right of first refusal, an action being challenged in the court by the Canadian firm-backed consortium.

The Aiteo-led consortium paid $2.562 billion to Shell, Total and Agip for OML 29 and the Nembe Creek Trunkline. Chevron, which has 40 per cent stake in the joint venture with the NNPC is not left out in the string of divestments by the IOCs as it also sold its 40 per cent stake in OML 83 and 85 to First E & P for $68 million.

The company also sold its 40 per cent stake in OMLs 52, 53 and 55 to Seplat Petroleum; Belemaoil and Amni Petroleum.

However, the bid value for OMLs 52 and 55 was not made public but the entire transaction was said to be worth about $900 million.

Seplat paid $259.4 million for OML 53 and an additional $132 million to acquire a 22.5 per cent stake in OML 55 from Belemaoil while Amni acquired OML 52.

Brittania-U Nigeria Limited had also paid initial deposit of $250 million, which was raised by some Nigerian banks for these three assets but Chevron is yet to refund the money, as the acquisition is currently the subject of litigation.

In the power sector, over $2.6 billion was staked in the acquisition of the assets of that once belonged to PHCN by the private investors.

Before the Taleveras Group paid $260.05 million for Afam Power Station and North West Power Consortium emerged preferred bidder for Kaduna Electricity Distribution Company based on reduction of Average Technical Losses, the private investors had raised a total of $2.238 billion to pay for 10 out of 11 distribution companies and five out of seven generation companies.

Taleveras Group later paid $260.05 million for Afam; while CMEC/Euafric paid $201 million for Sapele to bring the total figure financed by the banks to $2.699 billion.

For the distribution companies, 4Power Consortium paid $124 million for Port Harcourt Electricity Distribution Company; while Integrated Energy Distribution and Marketing Company paid $169 million and $59 million for Ibadan Disco and Yola Disco, respectively. Interstate Electrics paid $126 million for Enugu Disco; KANN Consortium paid $164 million for Abuja Disco; KEPCO/NEDC Consortium paid $134.75 million for Ikeja Disco; Sahelian Power SPV Limited paid $137 million for Kano Disco.

Others include Vigeo Holdings ($129.5 million) for Benin Disco; West Power and Gas ($135 million) for Eko Disco; and Aura Energy ($81.8 million) for Jos Disco. For the distribution companies, Transcorp paid $300 million for Ughelli Power Station; Amperion paid $132 million for Geregu Power Station; while CMEC/Euafric paid $201 million for Sapele Power Station.

Mainstream Energy Solutions Limited paid $257 million for Kainji/Jebba; North-

South Power Company Limited paid $111.654 million for Shiroro; KEPCO/NEDC paid $407 million for Egbin Power Station.

Nigerian banks accounted for the funding of these transactions, with UBA Plc alone, for instance, responsible for $82 million used for the acquisition of Shiroro.

CBN on the Look Out

The Central Bank of Nigeria (CBN) had stated in a circular last December 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.

But the implementation of the policy has since been deferred to ensure that the ongoing implementation of the Basel II/III capital adequacy framework is not dislocated, the

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.

But the CBN Governor, Mr. Godwin Ifeanyi Emefiele, in a recent interview with THISDAY, allayed the fears of industry watchers, saying the “the central bank has the numbers and we are looking at the numbers”.

“What you have seen is lending to the upstream oil and gas sector, which is a sector people feel is endangered right now because of the drop in crude prices. But I can tell you that even if you are a foreign bank that is operating in any part of the world it will also be affected by the drop in crude prices. But this is not to say that you have lost your money.

“What you will see is that if you had granted a loan for about four years, but because crude prices have dropped, the loan would have to be restructured for an extended period. So instead of four years, it becomes six, seven, eight or a 10-year term loan. But to say that those monies will not be collected is impossible, unless the crude price drops to zero, in which case nobody is buying crude oil again,” Emefiele had explained.

Also commenting on the financial system stability in the face of banks’ exposure to companies in the energy sector, a senior central bank official who preferred not to be named assured THISDAY that the CBN routinely carries out stress tests on Nigerian banks.

“We look at their portfolio on a regular basis because we recognise that oil prices have dropped and gas supply to the generation companies has been hampered and impacted on their revenue and that of the distribution companies.

“As such, banks are restructuring these loans to give the borrowers the leeway to repay their loans over a longer period. And this is why the CBN came in to cover the legacy debts in the power sector through the N213 billion intervention fund,” he said.

The CBN official disclosed that about 20 per cent of the N213 billion intervention fund for the power sector has been disbursed while more from the fund will be made available to sector operators once the impediments to gas supply are resolved.

“As you are aware, some progress has been made with respect to the fiscal terms for gas. The price has been reviewed from 75 cents to $3.00/mbtu, but there needs to be additional investment by oil and gas operators to ramp up domestic gas supply in the country and at the same time a cessation of vandalism of oil and gas infrastructure.

“Also, the issue of electricity tariffs is vital for operators for the disbursement of funds to happen, as electricity producers and distribution companies must recover their costs. So these are the issues we looking out before more funds from the N213 billion can be disbursed,” he said.

He maintained that Nigerian banks are some of the most regulated in the world, stating: “The capital adequacy ratio (CAR) for even the smaller banks is 8 per cent while for the systemically important banks (SIBs) it has been increased to 16 per cent using the Basel II /III capital adequacy framework.

“In Nigeria, we also insist that banks keep their deposit portfolios well in excess of their loan portfolios, which is not the case in other jurisdictions. This is done to ensure that banks are always liquid and meet their obligations to depositors at very short notice.”

Need for Closer Scrutiny

In a chat with THISDAY, banking analyst at Afrinvest Securities Limited, Mr. Ayodeji Ebo, said what most banks did to the power and oil and gas sectors loans was to extend the tenors of the loans in order to accommodate the present situation.

“The banks had to reduce the instalmental payments and increase the tenor of the loans. For the power sector, some of the banks are trying to convert some of the dollar-denominated loans into naira to reduce the foreign exchange risk,” he explained.

Also, the Chief Executive Officer, Diamond Bank, Mr. Uzoma Dozie, had said some of the concerns over the drop in oil prices were overblown. According to him, the exposure of banks to the oil and gas sector is within manageable level.

On his part, the Chief Executive Officer, First Bank, Mr. Bisi Onasanya, explained that bank’s involvement in the oil and gas sector spreads across the three segments. This he listed to include the downstream sector, upstream sector and the financing of contracts of oil majors.

“The risk there is totally limited; it involves trade finance risk. The upstream financing involves production of petroleum products; there we have about 10 per cent exposure and the cash flows to finance them are gotten from those oil wells. The third is the financing of the contracts of the oil majors,” he said.

Yet, the huge funds staked by the banks which were all structured on the basis of $70 to $100 per barrel and now pose a huge threat to the banking system with the price of oil at $45 per barrel and a looming threat that it could fall $20 per barrel, can no longer be ignored. In the power sector, most of the critical benchmarks promised by the federal government during the disposal of electricity assets in terms gas supply, generation and transmission, have also not been met.

Besides, the banks cannot shy away from the fact that it was their exposure to the oil and gas sector that accounted largely for the 2009 financial crisis in Nigeria. Even as the most regulated, and perhaps, the most scrutinised sector of the Nigerian economy, the financial system still needs closer monitoring by the central bank at this critical period to avert another crisis in the system, as this will have dire consequences on the economy already weakened by the plummeting price of crude oil.

– This Day
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