Financial Institutions Losses to Bad Loans in The First Quarter of The Year 2020

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Reflecting the impact of the Coronavirus pandemic and devaluation of the Naira, financial performance, banks’ losses to bad loans shot up by 99% in the first quarter of 2020 (Q1’2020), which caused profit growth rate to fall by 29%.

Analysis of the financial results of nine out of top ten banks for the first quarter ending March 2020 showed 19.7% year-on-year (YoY), increase in profit before tax, (PBT), to ₦263.51 billion in Q1’20 from ₦243.8 billion recorded in Q1’19.

This increase, however, represents 7.9 percentage decline in the profit growth rate when compared with the 27.6 percent, YoY increase recorded in Q1’19, from ₦216.2 billion in Q1’18.

The nine banks includes the five tier-1 banks which are Access Bank, First Bank, GTBank, UBA and Zenith Bank, and leading tier-2 banks which includes Fidelity Bank, Stanbic IBTC Bank, Ecobank Nigeria and FCMB.

Analysis revealed that the slowdown in profit growth was occasioned by sharp increases in losses to bad loans (loan loss expense) which rose to ₦36.1 billion, from ₦18.1 billion in the corresponding quarter of 2019 (Q1’19), representing 99 percent year-on-year (YoY) uptick.

Consequently, loan loss expense as a share of PBT rose by 85 percent, YoY to 13.7 percent in Q1’20 from 7.4 percent in Q1’19, indicating more of the banks’ profits were consumed by losses to bad loans.

IMF cautions CBN Meanwhile, the International Monetary Fund, IMF, has cautioned the Central Bank of Nigeria (CBN) against any attempt to relax loan classification and loan provisioning standards in a bid to moderate the impact of COVID-19 pandemic on the level of non-performing loans (bad loans) in the banking industry.

It in its review of the policy responses of the CBN to the likely impact of COVID-19 on the banking industry, IMF said:

“To be able to withstand large liquidity shocks, the CBN should intensify its monitoring of banks’ liquidity, particularly in foreign currency, and release the high effective CRRs as needed.

“Staff also supports the CBN in having banks consider temporary restructuring of loan terms but cautions that such relief should be provided only to fundamentally sound borrowers.

In any case, loan classification and provisioning standards should not be relaxed. “The CBN should also continue to strictly enforce the prudential FX exposure limits.

Cross-border contagion risk will be reduced by having Nigerian banks’ foreign subsidiaries hold additional capital cushions well beyond local capital requirements, which lessens the need to support them in stressed conditions.”

Banks’ bad loans The Tier-1 banks, namely Access Bank, First Bank, GTBank, UBA and Zenith Bank, recorded 20 percent, YoY, growth in loan loss expense at ₦26.1 billion in Q1’20 from ₦21.7 billion in Q1’19.

But the Tier-2 banks namely, Fidelity Bank, Stanbic IBTC Bank, Ecobank Nigeria and FCMB, recorded higher increase in loan loss expense which jumped to ₦10 billion in Q1’20 from loan recovery profit of ₦3.6 billion made in Q1’19, translating to 378 percent YoY deterioration.

Stanbic IBTC recorded the highest increase in loan loss expense during the quarter.

The bank recorded ₦2 billion loan loss expenses in Q1’20, as against loan recovery profit of ₦1.4 billion in Q1’19, indicating, 241.4 percent, YoY, deterioration.

Access Bank recorded the second highest increase in loan loss expense, which rose by 154.8 percent, YoY, to N8.6 billion in Q1’20, from N3.4 billion in Q1’2019.

Ecobank Nigeria came next with 140 percent, YoY, increase in loan loss expense, which rose to N2.2 billion from loan recovery profit of ₦5.5 billion in Q1’19.

Fidelity Bank and Zenith Bank followed with 103.2 percent and 88.5 percent, YoY, increases in loan loss expenses.

While Fidelity Bank recorded loan loss expense of ₦2.1 billion in Q1’2020, up from N1 billion, Zenith Bank on its part, recorded loan loss expense of ₦4 billion in Q1’2020, up from₦2.1 billion in Q1’2019.

On the sixth position is GTBank which recorded loan loss expense of₦1.2 billion in Q1’2020, representing 87.9 percent, YoY, increase when compared with ₦0.7 billion recorded in Q1’2019.

On the trail of GTBank is FCMB which recorded loan loss of ₦3.7 billion in Q1’2020, representing 60.6 percent, YoY, increase when compared with ₦2.3 billion recorded in Q1’2019. UBA had the least increase in loan loss expense.

The bank recorded loan loss expense of ₦2.6 billion in Q1’2020, representing, 53.1 percent, YoY, increase when compared with₦1.7 billion recorded in Q1’2019.

On the contrary, First Bank was able to reduce its loan loss expense by 30 percent, YoY, to ₦9.7 billion from ₦13.8 billion in Q1’19.

Analysts comment This trend according to Jerry Nnebue, a banking analysts with Cardinal Stone Research, is due to the combined effect of the requirement of International Reporting Standard, IFRS-9, COVID-19 pandemic and the recent devaluation of the Naira, adding that the trend will persist in the Q2’20.

He said:

“The increase in banks’ loan loss provisions partly relates to concerns about the ongoing COVID-19 pandemic.

Following the adoption of IFRS-9, banks are required to be more proactive in recognizing loan losses in line with the Expected Credit Losses framework, which takes into account the changes in conditions that can affect the ability of obligors to fulfill their obligations.

“The emergence of COVID-19 is so disruptive that banks are now more likely to assume a higher probability of default.

In addition, the recent currency adjustment by the CBN may have also led to higher loan loss charges for banks with higher exposure to foreign currency (FCY)-related loans.”

Corroborating this development, Aderonke Akinsola, Head, Financial Service Research at Chapel Hill Dunham, said:

“The material decline in crude oil prices, driven by lower demand due to COVID-19 and oversupply (following the inability of Saudi and Russia to agree in March), the reduction in trade as well as broad slowdown in economic activity as most countries commenced lock-downs in March were the key indicators that pointed towards weaker asset quality within the Nigerian banking sector.

“Concerns around the significant exposure of banks’ loan books to the oil and gas sector, which are largely dollar denominated is further heightened by the devaluation of the Naira post the decline in external reserves reserves.

“Given these current realities, we see banks posting higher credit losses in 2020.

We believe impairments will be higher in the second quarter as oil prices dipped further and major states in the economy were on lockdown for five weeks.

In our view, weak macro, depressed oil prices, and further devaluation are the major downside risks to asset quality in the second half of 2020.”

Also projecting further deterioration in banks’ loan loss expense, former Chief Economist, Zenith Bank Plc, Marcel Okeke, said:

“The huge loan loss in Q1’20 is a ‘hang over’ of the situation in 2019.

Many banks that have much exposure to power sector entities and some local oil and gas players, have so much non-performing loans (NPLs) in their books.

So, as the situation is getting tougher, they’re appearing in the books.”

Okeke who is also the Chief Executive Office/Lead Consultant, Mascot Consult Limited, added that, “For Q2’20, the situation is most likely to get worse.

As of today, the deadly impact of COVID-19 is yet to be fully estimated.

The lockdown is still on; and as it ‘life or death’ for humans, so it is for businesses.

For sure, some of the hugely indebted businesses might die with COVID-19 and their debt.

So, by end-Q2, a worse loan loss report is sure to emerge.

Even the banks might be gasping for breath, if no lifeline is thrown their way.” Profit growth rate drops The five Tier-1 banks suffered more severe slow down in profit growth.

The five banks recorded PBT of ₦224.7 billion, representing growth of 8.3 percent, when compared with N207.4 billion recorded in Q1’19.

The growth in profit was, however, 7.4 percentage point, YoY, against the 15.7 percent growth recorded in Q1’19.

The four Tier-2 banks, however, experienced marked improvement in profit growth.

The four banks recorded PBT of ₦38.82 billion in Q1’20, representing 6.7 percent YoY growth, when compared with ₦36.38 billion recorded in Q1’19.

The growth, however, translated to 200 percent increase when compared with the 6.6 percent profit decline they recorded in Q1’19.

Banks with negative growth rate Access Bank grew its PBT by 2.7 percent, YoY, to ₦46.3 billion in Q1’20 from N45.1 billion in Q1’19.This growth, however, represented a huge 63.3 percentage decline when compared to the 66 percent growth recorded in Q1’19, with a PBT of ₦27.2 billion in Q1’2018.

GTB grew its PBT by 2.1 percent, YoY, to ₦58.2 billion in Q1’20 from ₦57 billion in Q1’19.

The growth in PBT however represents 6.3 percentage point decline when compared to the 8.4 percent growth recorded in Q1’19, from PBT of ₦52.6 billion in Q1’2018. UBA grew its PBT by 8.6 percent, YoY, to ₦32.7 billion in Q1’2020 from ₦30.2 billion in Q1’2019.

The growth in PBT however represents 36 percent decline when compared to the 13.5 percent growth recorded in Q1’2019, from PBT of ₦26.6 billion in Q1’2018.

Zenith Bank grew its PBT by 2.6 percent, YoY, to ₦58.8 billion in Q1’2020 from ₦57.3 billion in Q1’2019, the growth in PBT however represents 57percent decline in growth when compared to the 6.1 percent growth recorded in Q1’2019, from PBT of ₦54 billion in Q1’2018.

Fidelity Bank recorded 1.4 percent, YoY, decline in PBT to N6.6 billion in Q1’2020 from ₦6.7 billion in Q1’2019.

This is represents 2,528 percent reduction in PBT growth when compared to the 34 percent growth recorded in Q1’2019, from PBT of ₦5 billion in Q1’2018.

Though FCMB grew its PBT by 26.5 percent, YoY, to ₦5.4 billion in Q1’2020 from ₦4.3 billion in Q1’2019, the growth in PBT however represents 11.6 percent decline in growth when compared to the 30 percent growth recorded in Q1’2019, from PBT of ₦3.3 billion in Q1’2018.

Banks with positive profit growth However FBN Holdings, Ecobank Nigeria and Stanbic IBTC recorded improvement in profitability growth during the quarter.

FBN Holdings recorded 61.2 percent, YoY, growth in PBT to ₦28.7 billion in Q1’2020, from ₦17.8 billion in Q1’2019.

This represents 1,192 percent increase in growth when compared with the 5.6 percent decline in PBT recorded in Q1’2019 from ₦18.8 billion in Q1’2018. Ecobank Nigeria recorded 29 percent growth in PBT to ₦2.42 billion in Q1’2020 from ₦1.88 billion in Q1’2019.

This represents 462 percent increase in growth, when compared with the eight percent decline in PBT recorded in Q1’2019 from ₦2.04 billion in Q1’2018. Stanbic IBTC recorded 3.8 percent growth in PBT to ₦24.4 billion in Q1’2020 from ₦23.5 billion in Q1’2019.

This represents 131 percent increase in growth, when compared with the 12 percent decline in PBT recorded in Q1’2019 from ₦18.8 billion in Q1’2018.

Source-Vanguard

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