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    Home ยป Nigeria: N1.7trn bad loans threaten banks – CBN

    Nigeria: N1.7trn bad loans threaten banks – CBN

    October 8, 2016
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    *CBN logo.
    *CBN logo.

    08 October 2016, Abuja — As the nation’s economy battles recession, there are indications that the banking industry’s stability has come under severe threat.

    The financial system stability report by the Central Bank of Nigeria, CBN, indicated a steep rise in Non-Performing Loans, NPLs, as a result of prevailing economic headwinds.

    Going by the report, titled Financial Stability Report’, the most recent, which covered the first half of this year, the apex bank warned that the banking sector lacks the requisite capacity to withstand the effect of the bad loans.

    It stated: “The industry ratio of non-performing loans net of the provision to capital increased significantly to 30.9 percent at end-June 2016 from 5.9 per cent at end-December 2015, depicting weak capacity of the sector to withstand the adverse impact of non-performing loans.

    “Non-performing loans in the period under review grew by 158 percent from N649.63 billion at end-December 2015, to N1.679 trillion at end-June 2016.”

    According to the CBN, the industry-wide NPL ratio rose to 11.7 percent in June from 5.3 percent in December 2015, exceeding the prudential limit of 5.0 per cent.

    Analysing the capital adequacy of the banks in terms of rising NPLs, the CBN said: “During the period under review, indicators of capital adequacy showed marginal declines in the Nigerian banking sector, compared with the positions in the preceding and corresponding periods of 2015.”

    The CBN, however, noted that only five large banks showed resilience to the rising credit risk, even at the point of a 200 per cent increase in the NPLs, while the others showed vulnerabilities.

    5 big banks resilient
    “The large banks were resilient to credit risk and would be able to sustain an impact of the most severe shock of a 200 per cent rise in NPLs as it resulted in 12.60 per cent Capital Adequacy Ratio, CAR, which was above the 10 percent minimum requirement.

    “However, banking industry, medium and small bank groups, showed vulnerability to the most severe shock of 200 percent rise in NPLs as their CAR fell to 8.01, 2.51 and -83.32 per cent respectively,” the CBN disclosed.

    According to the CBN, the rising credit risk will be occasioned by increased loan impairments, resulting from the depreciation of the Naira, inability of obligors to service foreign currency-denominated loans, as well as bank exposures to the oil and gas sector.

    Continuing, the CBN noted: “Assets quality, measured in terms of the ratio of non-performing loans to gross loans, weakened in the first half of 2016, deteriorating by 6.4 percentage points to 11.7 percent at end-June 2016.

    “The prevailing inflationary trend and the liberalisation of the foreign exchange market, which witnessed significant depreciation of the Naira/Dollar exchange rate, during the second quarter of 2016, contributed to the decline in assets quality.

    “These developments led to increased cost of funds and constrained borrowers’ ability to service outstanding loans, thereby increasing default risk.”

    The weak performance of the banking sector in the first half of 2016 came against the backdrop of a huge drop in the market share and deposit base of big banks.

    *Michael Eboh & Chiamaka Ajeamo – Vanguard

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