27 February 2016, Lagos — There is clear evidence that the banking sector is going through tough times as loan impairment charges (loan loss provisions) may hit N346 billion in the financial reports for the period ended December 31, 2015.
Already profit depression warning has been announced by two major banks, with First Bank of Nigeria Plc, FBN, coming yesterday to declare that there will be a major decline in its earnings in the financial results being finalized for public presentation any moment from now.
First City Monument Bank Plc, FCMB, had led this emerging scenario with a similar warning last month, followed with the announcement of its 2015 nine months result showing a massive drop in profit.
Investigations revealed that cumulative industry provision for loan losses had reached over N200 billion by first nine months of the year, with the first nine banks reporting a total of N124.1 billion loan loss provisions.
Industry analysts said that aggregate industry profit would drop by 50 percent against the 2014 figures, which gives about N346 billion.
The total industry profit in 2014 was N692 billion, which showed a significant rise against the N521 billion declared in 2013.
In a letter to the Nigerian Stock Exchange, NSE, yesterday FBN attributed the development to worsening macroeconomic environment as well as inclement monetary and fiscal policy which prevailed since mid last year.
The letter, signed by the company secretary, Tijani Borodo, stated: “Following the preliminary review of FBN Holdings Plc (“FBNH” FBN Holdings” or the “Group”) Management Accounts for the year ended December 31, 2015, it is expected that earnings will come below that of the previous year.
“The reduction in earnings is as a result of the recognition of impairment charges on some specific accounts resulting from a reassessment of the loan portfolio within our commercial banking business.
“This reassessment was driven by the challenging macroeconomic environment, coupled with fiscal and monetary headwinds which have resulted in marked reduction in domestic output”.
The statement added that further details of the Group’s financial performance will be disclosed when the full year audited financial results were announced and during subsequent results conference call.
The negative development in the industry had seen FBN leading in the size of loan loss provision in the first nine months of the year 2015, with about N46.6 billion, up by 249 per cent from N13.4 billion recorded in the corresponding period of 2014.
But in the growth rate of the bad books, Stanbic IBTC was leading with 521 per cent rise in loan impairment figures at N12.5 billion as against N2.0 billion in the corresponding nine-month period of 2014.
Industry analysts’ comments
Afrinvest Group, a Lagos-based investment house, gave a picture of what are some of the challenges the banks were facing since 2015.
According to the group, “despite acclaimed foreign exchange hedging by the banks in terms of lending to the oil and gas space which are mostly dollar -denominated, we expect banks’ cost of risk (cost of loans, including losses) to increase in 2015.
“The lag effect of the sharp decline in global oil prices which started late 2014 may weigh down on oil companies’ profit margins, hence, affect loan repayment.
“Additionally, the delayed payment of subsidy (above normal 45-day payment cycle) by the federal government may also contribute to the challenges to credit in this space. Against this backdrop, we expect collectively and individually assessed impairment charges”
Speaking to Vanguard against the backdrop of FBN profit warning yesterday, the chief economists at FSDH Merchant Bank, Mr. Ayodele Akinwunmi, said banks had a lot of loan exposures to the oil and gas industry upstream.
He said with the declining oil price, it had been difficult for the operators to meet their obligations to the banks.
Other commentators said FCMB and FBN would be followed by virtually all banks in announcing profit drop warnings since the same circumstances faced all of them, though with different levels of impact.
*Emeka Anaeto – Vanguard