Banks restructure oil sector loans on crude price slump

10 February 2016, Abuja – Given the continued decline in oil prices, commercial banks have started restructuring the tenures of their upstream loans to 10 years, up from five years, using a benchmark of $30 per barrel, a report has revealed.

Oil prices drop

Oil prices drop

Research and financial advisory firm, Renaissance Capital (RenCap), which stated this in a report titled: “Between a rock and a hard place – the currency conundrum,” obtained yesterday, also revealed that midstream/service loans are also being restructured but banks.

Crude oil prices eased yesterday as a meeting between OPEC producers Saudi Arabia and Venezuela showed little indication that steps would be taken to boost prices. Sprcifically, global benchmark Brent futures were down to $34.98 earlier yesterday. It had fallen to $34.06 a barrel on Friday.

To this end, the RenCap report predicted that non-performing loan could build-up in the sector, where projects are cancelled or suspended and vessels are made idle; there were no major concerns expressed on downstream exposures.

The report, which was the findings from meetings with commercial banks, stated that the bigger asset-quality concern of the banks was their non-oil loans, which according to them was suffering from the sharp slowdown in economic activity and worsening forex scarcity issues, and the unpredictable downward spiral these events could lead to.

“That said, it remains the case that the banks are acknowledging the problems but on cost of risk guidance no-one is guiding to a blowout scenario because: the states got bailed out; the forex stance has allowed the banks time to significantly close their open trade positons; and the banks really believe stronger supervision and risk management makes them better prepared than during the last crisis.

“That said, we felt NPL crystallisation is a timing issue and it’s best to remain cautious. Overall, Access Bank came across as being most on top of risk management,” it added.

But when contacted on the development, the Executive Director, Corporate Finance, BGL Capital Limited, Mr. Olufemi Ademola, described it as a proactive move by the banks. This, according to him would be better for the banks compared with a situation whereby the loans would be taken completely as impaired.

Speaking in a chat with THISDAY, he said: “It is okay, better than what it used to be before. Before now, what most of the banks did was to benchmark their oil and gas loans to $45 per barrel.

“But what they have done was a reaction to reality. Some consecutive people may even argue that $30 per barrel is too high. But what we might see is that most of the banks will not be able to give new loans in the oil and gas sector. With that, their cash flow expectations would be lower,” Ademola added.

Continuing, the RenCap report revealed that among the tier 1 banks, the low interest rate environment has led to some level of price war in the space.

According to the report, while the other tier 1 banks appeared have re-priced their loans downwards on a selective basis, GTBank had re-priced its loan book downwards by 150-200 basis points and has recorded success in poaching some high-quality corporates from other banks.

“We didn’t get a sense that other banks were replicating this strategy but think that, as time goes on, the pressure to defend asset share will increase, with the smaller banks potentially risking the loss of quality names to bigger banks with comfortable capital and liquidity levels.

“This would essentially be a subtle reversal of the trend of 2011-2013 when the tier 2 banks managed to chip market share from the big banks by competing on price; then, banks had just been bailed out by AMCON, capital levels were strong and tier 2 banks wanted to move up the risk ladder post crisis,” it added.

“The banks are between a rock and a hard place as the absence of a devaluation grinds economic activity to a near halt, while a devaluation has capital and asset-quality implications. However, the banks felt the latter is a more desirable outcome as businesses would at least be able to plan appropriately,” the report added.

About the Author