Tier 1 banks seen navigating headwinds as investors await results
by BALA AUGIE
March 9, 2018 | 1:40 am| | | Start Conversation
As investors await the declaration of full year 2017 results by the nation’s banks, there are indications the tier 1 lenders might be better positioned to weather the storm of an economic recession from which the nation is emerging.
The tier 1 banks have better capital buffers, more reserves, large market share and better risk management strategy, all of which will help them cushion the provisioning they are expected to take following the rising non-performing loans (NPL) portfolio in their books.
There are legacy issues rising from loans to the power sector while there is of course the lingering haircut that could result from the exposure to 9 mobile (formerly Etisalat), which experts put at around 20 percent.
The banks’ biggest concern in all of this is that if the sale is not concluded in a timely fashion, 9Mobile will become cash strapped, which increases the risk of the banks taking even higher haircuts, according to analysts at Renaissance Capital.
An improvement in crude oil price to $60 from a record low and stellar performance by indigenous oil companies due to improved production following the restoration of peace in the Niger Delta region is helping banks boost their balance sheet.
Also, higher interest income from holding government debt and a rise in profit will help the big banks bolster their capital buffers.
“We expect most the tier 1 lenders to maintain the positive form and the stock market has already factored the positive expectation. I believe most of them will do well since the economy has improved,” said Ayodeji Ebo managing director and CEO of Afrinvest Securities Limited.
“There should be some improvement in the quality of their assets on the back of improved economy and stability in the oil and gas space. Foreign exchange stability should be a plus for companies that had borrowed money from them,” said Ebo.
The lifting of a force majeure in the third quarter of 2017 was a boon for the indigenous oil and gas firm Seplat Petroleum Development Company Plc as it resumed production and it posted a net income of $265.13 million in December 2017 after the attacks by militant on Forcados terminals resulted in a loss of $116.09 million in 2016.
The country’s gross domestic product expanded for three consecutive quarters last year after 1.60 percent contraction in 2016, with year on year growth of 1.90 percent in the last quarter of 2017.
The introduction of a new foreign exchange policy by the central bank amid a rebound in crude oil prices helped to improve the flow of investment into the country, while paving the way for lenders to have access to dollars.
While the small and mid-sized banks are grappling with rising bad loans and higher capital adequacy ratios brought on by an economic recession of 2016 that hindered customers from meeting their obligation, tier 1 lenders like Access Bank, Zenith Bank, United Bank for Africa (UBA) and Guaranty Trust Bank (GTBank), through meticulous portfolio allocation, were able to keep Non Performing Loans (NPLs) below the 5 percent regulatory threshold.
“We think oil prices holding above $55/bl puts oil and gas industry lenders in a better position to service their debt, and those banks that are holding on to oil and gas assets as collateral will be better able to dispose of these assets in a high oil price environment,” said Olamipo Ogunsanya, an analyst at Renaissance Capital in a Feb. 5 note on the Nigerian Banking sector.
Zenith Bank Plc, United Bank for Africa and Access Bank were able to raise funding in the Eurobond market last year.
Analysts, however expect the introduction of IFRS 9 reporting standard, which will require higher provisioning, to result in higher capital adequacy ratio.
Fitch Rating has warned that Nigerian banks will struggle to sustain the same level of profitability this year due to reduction in government borrowing through treasury bills (T-Bills).
“The slowdown in T-bill issuance marks a change of strategy as the government looks to increase its financing from external sources and longer-dated domestic issuances. Record T-bill issuance in 2017 helped support the Central Bank of Nigeria’s strategy to maintain naira exchange-rate stability,” Fitch said.
“We expect falling T-bill yields and lower issuance to put pressure on Nigerian banks’ profitability in 2018. The CBN’s latest issuance schedule shows NGN1.1 trillion ($3.6 billion) of rollovers in 1Q18 against N1.3 trillion of maturing bills. In 2017, rollovers fully covered maturing bills.”
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