Banks’ asset quality seen improving on oil rally
by BALA AUGIE
November 1, 2017 | 1:14 am| | | Start Conversation
Nigerian banks assets quality is expected to improve on the back of higher oil price that could give oil and gas firms the leeway to service loans borrowed from lenders in the boom times.
Nigeria Banks became exposed to the oil and gas when oil firms borrowed money from them to buy energy assets when oil prices were above $100 per barrel some 3 years ago.
Trouble began when oil price suddenly crashed to below $40 in 2015, turning hitherto performing loans to bad and irrecoverable as most oil assets used as collateral (asset/reserve backed lending) became worth less than the value of loans.
In the two years before crude oil prices began falling in mid-2014; Nigerian banks lent an estimated $10 bn to local oil and gas companies to buy assets from Royal Dutch Shell, Eni and Total as they retreated from the country’s onshore industry.
“It is positive for the banks because we expect impairment charge to drop which will be a write back to profit as more loans will be serviced. This will bolster their bottom line (profit),” said Ayodeji Ebo, Managing Director/ CEO of Afrivest Securities Limited.
“It is also a boon for operators in the sector because most had restructured their loans at the bottom of falling prices,” said Ebo.
Brent crude was up 28 cents or 0.5 percent at $61.18 a barrel by 12:20 p.m. E.T, close to its July 2015 highs reached earlier this week, and up around 37 percent from its 2017 lows hit in June.
The cumulative Non Performing Loans (NPLs) of 10 lenders as at the half year, 2017 period dropped by 5 percent to N853.97 billion from N897.67 billion as at June 2016.
The banks are Zenith, Access, Diamond Bank, Fidelity, First City Monument Bank (FCMB), Stanbic IBTC Holding, First Nigeria Bank Holing (FBNH), United Bank for Africa (UBA), Union Bank, and Sterling Bank.
Lenders in Africa’s most populous and largest oil producer are making progress in assets quality as loan recovery improves while risk assets strategy continues to pay a key role in persistent decline in NPLs.
FBNH just released its third quarter financial results that showed NPL ratio fell to 20.1 percent from 22.0 percent the previous year. Impairment charges on credit losses declined 14.9 percent as the lender continued to progress on remediation, recoveries and asset quality strategies.
Fidelity Bank’s NPL ratio improved to 5.9 percent in September 2017 from 6.6 percent as at December 2016, due to a combination of N2.9 billion drop in absolute NPL figure and N42.3 billion increase in total loan book.
“Because most businesses can improve on the back of increased oil price, they will be able to service their debt, which is positive for banks,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited.
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