Paradox of healthy banks in a sick economy

Kemi Adeosun, Minister of Finance and Senator Udoma Udo Udoma, Minister of Budget and Planning.

The Central Bank of Nigeria (CBN) and its partner regulatory institution, Nigeria Deposit Insurance Corporation (NDIC), not too long ago gave a clean bill of health to Deposit Money Banks (DMBs) in Nigeria.

After their separate diagnosis, the apex bank came out strongly with the result that   “the banking system is safe and sound,” while in its 2015 annual report released first quarter of this year, the NDIC described the banking industry as “stable and sound.”

But NDIC added that this impressive verdict was in spite of a 2.83 per cent decline in total deposit liabilities, 2.02 per cent decrease in  unaudited profits while bad  loans increased by 82.87 per cent.

Shareholders who have no reason to doubt, except when it affects their dividends took the message home rejoicing as those who had been sleeping with an eye open over the state of their banks, began to sleep with both eyes closed.

The President of Renaissance Shareholders’ Association, Ambassador Olufemi Timothy, not only amplified this, but brought the message home when he spoke at a forum in Lagos. He said that Nigerian banks are “healthy and robust in spite of the global economic recession.”

“I can tell you authoritatively that our banks are strong and safe. Despite the global economic recession, and the attendant effect on the financial system, our banks are robust and healthy. The apex bank’s interventions have strengthened our banks.”


State of the economy

These assurances are indeed good news that should gladden the heart of any patriotic Nigerian, whether he or she has a bank account or not. But the irony is that the economy on which the banks stand is already sick. Just last week, the National Bureau of Statics (NBS), in its Gross Domestic Product (GDP) Report for the Second Quarter (Q2) of 2016, stated that Nigeria’s Q2 GDP was lower by 1.70 per cent points from a negative growth rate of 0.36 per cent  recorded in the preceding quarter.

Elementary economists describe gross domestic product as one of the primary indicators used to measure the health of a country’s economy. It represents the total dollar (naira) value of all goods and services produced over a specific time period. It can be thought of as the size of the economy.

The NBS said it is also lower by 4.41 per cent points from the growth rate of 2.35 per cent recorded in the corresponding quarter of 2015. This officially places Nigeria in a recession, which is defined by two or more consecutive quarters of negative economic growth.

“Technically, in economic terms, if you have two periods of negative growth, you are technically in a recession. Technically, we are in recession.”

Those were the words of Nigeria’s finance minister, Mrs Kemi  Adeosun when she appeared before law makers  two months ago, even before the release of Q2 figures.

Every day, Nigerians are struggling with the cost of basic amenities as prices soar and the value of the naira depreciates agaist the US dollar. This rapid decline in growth marks the worst recession Nigeria has experienced since the Ibrahim Babangida regime, when the economy declined by 0.51 per cent and 0.82 per cent in two consecutive quarters in 1987.

Moodys, an international rating agency, on Friday observed that that Nigeria’s government lack of money to carry out daily commitments are increasing amid growth and inflation challenges.

The Central Bank of Nigeria (CBN) last week reported that activities in the manufacturing sector in the Nigerian economy shed weight by two per cent compared with the volume of July. In its Manufacturing Purchasing Managers’ Index (PMI ) Report, the apex bank said activities declined to 42.1 index points in August 2016, compared to 44.1 in the preceding month, thus confirming an earlier survey conducted by NOIPolls in May which indicated that activities in the sector were on the downward trend.

The Statistics Department of the CBN conducts a monthly survey of purchasing and supply of manufacturing and non-manufacturing organisations in 13 locations in Nigeria: two states in each of the six geo-political zones, and the FCT.

The survey result is used to compute the monthly Purchasing Managers’ Index (PMI). They are the first indicators of economic conditions published each month.

Investors are aware that a composite PMI above 50 points indicates that the manufacturing/non-manufacturing economy is generally expanding, 50 points indicates no change and below 50 points indicate that it is generally declining.

Economic activities have slowed down to a near standstill while the government continues to struggle to finance its capital projects amidst sharply depleting fiscal and external buffers.

A herd of economic analysts are concerned that when the  government which is the biggest spender in any economy has no money to execute projects, its effect is usually transmitted to several sectors because money does not flow throw the banking system. Government sources have confirmed that a lot of contracts have been approved but no money to mobilise contractors. “Those who used their money to start projects are being owed,” a top civil servant confided on Nigerian Tribune.

According to him, many people whose salaries and other income go through the banking system are out of jobs. Interest rates are so high that SME operators who are the engine of any economy can’t borrow and run profitably, while corporates are declaring loses from every sector.

Coupled with the above, the Manufacturer’s Association of Nigeria (MAN) revealed recently that over 200 Small and Medium scale Enterprises (SMEs) within the sector have shut-down while some have downsized or relocated their business to neighboring countries.

Among other functions, the most important function of commercial banks is to accept deposits from the public. Various sections of society, according to their needs and economic condition, deposit their savings with the banks. After accepting deposits from the public, the banks then advances loans to the people or companies that require cash and earn interest income.

The big questions most analysts are then asking are that with all the regulatory and increased business risk challenges facing the industry, are the banks giving out loans and gaining interest income? In view of prevailing currency crisis, are the banks making foreign exchange (forex) loses or gains?

Which companies or individuals are the banks really servicing profitably? Where a business man who saves N100,000 every month, now loses N17,100 out of that money to inflation, leaving him with N82,900 where is the motivation to save?

Are the banks really strong, safe, sound and healthy as the regulators have announced? Beyond the figures these banks declare as gross earnings and claims to assets growth, are the banks really making profit and delivering sustainable returns to shareholders in the present state of the economy?


State of the Banking Industry

Just last week, Media investigations revealed that Diamond Bank Plc, Heritage Bank Plc, Zenith Bank Plc, First Bank Plc and Wema Bank Plc have reduced their workers’ salaries as of August 31, 2016. This has also been confirmed by management sources and workers in the affected banks.

While Diamond Bank was said to have slashed salaries by 30 per cent, Heritage by 30 per cent, First Bank and Wema Bank workers’ salaries were slashed by 20 per cent each.

It was learnt that the banks tied the decision to cut salaries to workers’ ability to meet deposit targets, which have become unrealistically high in recent time. Hence, workers who failed to meet their targets had their salaries slashed. The, question properly asked by other analysts is “are the banks really safe and strong?”

To assess the strength of the nation’s banks, the Central Bank of Nigeria (CBN) is currently conducting stress tests on them. But depositors have been told not worry as the tests are routine, according to stakeholders.

Top-ranking sources in the banks said “The CBN is conducting liquidity ratio and capital adequacy tests to determine how strong the banks are.”

Meanwhile, some banks said their capital adequacy ratio is at confortable levels. For instance, Zenith Bank’s Group Managing Director, Mr Peter Amangbo said the bank “continues to maintain robust liquidity ratio of 55 per cent which is firmly above the 30 per cent minimum statutory requirement for the period ended 30 June 2016. The group’s Capital Adequacy Ratio (CAR) stood at 19 per cent  which is above the 15 per cent regulatory limit.”

Access Bank said it’s capital adequacy ratio (CAR) improved by 110 basis points to 19.5 per cent in 2015 as against 18.4 per cent in 2014, driven by a successful equity raising during the year. Group Managing Director, Access Bank Plc, Mr. Herbert Wigwe said “the first-half performance shows continuing resilience of the bank in the face of a challenging macro-economic environment, which has been further exacerbated by double-digit inflation, amid an untimely devaluation.”

The Central Bank of Nigeria recently sacked the management and Board of Directors of Skye Bank Plc following the bank’s inability to meet minimum capital adequacy ratio requirement. Diamond Bank’s capital adequacy ratio had fallen to 15.6 per cent of assets by mid-year from 18.6 per cent a year ago.

The bank’s chief executive, Uzoma Dozie, told an analysts’ conference call, “We are doing a capital management plan and that will determine how much capital we want to raise, tenor and size.

“We don’t have any need to grow our branch network any more. We are also looking at some assets that we can dispose of and we are a long way into that.”

FCMB’s capital adequacy ratio was close to the regulatory limit of 15 per cent of assets at mid-year, and the bank’s management say the capital raising is to provide an additional cushion. Kennedy  Uzoka, Group Managing Director United Bank for Africa (UBA) assured that; “UBA will sustain its culture of keeping a healthy balance sheet, with strong liquidity and capitalization, as reflected in the liquidity and BASEL II capital adequacy ratios of 45 per cent and 18 per cent respectively.”

The Afrinvest (West) Africa Limited in analysing the industry in 2015 stated that “For most part of the year, banking liquidity was affected by further tightening by the CBN’s policies through the increase in rates and the increase in Cash Reserve Ratio (CRR). There was also the introduction of the Treasury Single Account (TSA), which saw most of the cheap funds leave the banking system.

Another major event for banks was the further reduction of Commission on Turnover (COT). All of these put further pressure on the earning ability of banks for 2015 and has dragged on till the last six months.

There were also issues of capital adequacy as industry asset quality deteriorated. This was reflected in the increase in loan loss expenses and Non-Performing Loans (NPLs) ratios.

Mounting pressures on asset quality increased due to exposure to distressed sectors, power, oil and gas, which on the average accounted for about 26 per cent of the total loan book size of the Nigerian banking sector.

Industry Non-Performing Loans which are loans borrowers no longer pay back increased from three per cent in 2014  to 5.5 per  cent in 2015.

Supporting this figure is the Financial System Stability Report released recently by the CBN, it showed that in May 2016, NPL in the banking industry rose sharply by 78 per cent to N649.63 billion year-on –year basis.

Most industry watchers are seriously worried that N649.63 billion of loans that may never be recovered, is already above N620 billion which the CBN in 2009 injected into the banking sector to save it, and replaced the leadership of eight Nigerian banks.

This is not forgetting the fact that at N649.63 billion, the total amount of Non-Performing Loans in the banking industry is enough to obtain 12 international banking licenses and 25 national banking licences in Nigeria. At the moment, there are 22 commercial banks, four merchant banks and one non-interest bank. Nigerian banks have suffered from the slump of commodity prices, and slowing economic growth.

“Bad loans are dangerous for the health of DMBs and everything that is necessary must be done to ensure we do not relapse into scenarios from our recent past when our banks had to be bailed out to avert a total collapse. The poor state of the banks at the time led to the government’s establishment of the Assets Management Corporation of Nigeria (AMCON), through which over N2 trillion was used to bail out some distressed banks,” a top banking executive who do not want to be named told Nigerian Tribune.

Similarly, the NDIC report also put the total amount lost to 12,279 fraud-related cases in the banking sector at N18.021 billion for 2015, a drop of N7.59  billion or 29.63 per  cent compared to the N25.608 billion lost in 2014.

Concerns about asset quality, capital adequacy and cost of risk have all contributed to the sector being one of the hardest hit sectors. Oil and gas sector remains one of the biggest debtors of commercial banks.  The oil sector has been the major driver of the Nigerian economy, yet, statistics from the CBN as of March 2016, put credit allocation to downstream oil and gas operations, natural gas and crude oil refining at N2.237 trillion. The CBN data showed that the sector owed commercial banks over N2.272 trillion as at December 2015 and over N2.299 trillion in February.


Levels of returns and profitability

Most present and ex-bankers have at different occasions complained that, the tougher operating environment is reflected in industry levels of profitability and asset quality. A few profitability ratios can provide further clue to the health of the banks.

Guaranty Trust Bank’s Q2 Net Margin stood at 36.9 per cent. Net margin is one of the most closely followed numbers in finance. Shareholders look at it closely because it shows how good a company is at converting revenue into profits available for shareholders.

A declining net margin over time could be a problem. Union Banks Net margin berthed at 14.6 per cent. For Zenith Bank Net Margin decreased to 13.4 per cent as against 14.8 for the previous period. Wema Bank’s Net margin stood 4.5 per cent. For Access Bank, Net Margin stood at 21.3 as against 18.5 per cent the previous year.

From the list of banks that have released half year (H1):2016 results, First Monument Bank (FCMB) recorded 259.9 per cent rise in impairment charges.  Impairment is specifically used to describe a reduction in the recoverable amount of a fixed asset below its book value. Impairment normally occurs when there is a sudden and large decline in the fair value of an asset below its carrying amount.

When it refers to loans, they are loans that may no longer be recovered. An accountant tests assets for impairment periodically; if any impairment exists, the accountant writes off the difference in the fair value and the book value.

Union Bank of Nigeria (UBN) (+195.3 per cent) and ETI (+84.8 per cent) recorded the largest spikes in impairment charges. Zenith Bank’s PAT dropped further by 15.73 per cent to N44.84 billion (vs. N53.18 billion in H1’15), just as it recorded a decline in top line of 6.23 per cent to N214.81 billion for H1’16 (vs. N229.08 billion in H1’15) which was largely aided by the loss reported in trading income for the period. Impairment charge significantly affects a bank’s bottom line. Having reported a rise in

Impairment charges of 23.30 per cent in Q1’16, shareholders would have been excited to see a reduction in impairment charge for Zenith Bank in H1’16. However, this was not the case as the bank posted a massive rise of 97.64 per cent  on impairment charge for credit losses to N14.23 billion (vs. N7.20 billion in H1’15).

Also in relation to Profit after Tax (PAT), Unity Bank recorded a decrease of 70.2 per cent. Sterling Bank (-25.9 per cent) and Diamond Bank (-25.5 per cent) recorded the largest Y-o-Y declines in PAT.

For a few banks including FBN Holdings Non-Interest Income (NII) was up 52.0 per cent Y-o-Y, and profitability was buffered by higher Non-Interest Income (NII) which partially offset higher impairment provisions.

In the same vein, Fidelity Bank’s net income dropped by 31.91 percent to N5.59 billion from N8.21 billion as at June 2015, despite a strong net interest income.

More worrisome is the bank’s cost to income ratio (CIR), which increased to 79.15 percent in June 2016 as against 72.19 percent the previous year. The bank is therefore spending nearly N80 out of every N100 in revenues and there is no significant different from others.

Further breakdown of the Q2 report of the various banks are as follows:  Wema Bank Q2:2016 result showed PAT stood at N1.1 billion, Loan to deposit ratio is 61.9 per cent. The loan to deposit ratio is used to calculate a lending institution’s ability to cover withdrawals made by its customers. A high loans to deposits ratio means that the bank is issuing out more of its deposits in the form of interest-bearing loans, which, in turn, means it’ll generate more income.

The problem is that the bank’s loans aren’t always repaid. Plus, the bank has to repay deposits on request, so having a ratio that’s too high puts the bank at high risk. A very low ratio means that the bank is at low risk, but it also means it isn’t using its assets to generate income and may even end up losing money.

Guaranty Trust Bank Loan to Deposit Ratio stood at 77.8 per cent, with 531.0 per cent in impairment charges compared with 12.4 per cent at the end of 2015.


Way forward in a period of recession

What should the banks be doing at the moment? President and chairman of council Chartered Institute of Bankers of Nigeria (CIBN), Professor Segun Ajibola did not mince words when he suggested that microfinance banks can help even as commercial banks have no option than to refocus on retail banking, which is their core function. By so doing, the MFBs and DMBs will empower the masses of the people in various sectors of the economy.

“Those who have micro businesses to pursue should be given all the support. The vulcanizer, the welder, Hairdresser outside there, the woman making detergents outside there, the restaurants and many more should be empowered. If the empowerment could come from the bottom, then it will gravitate to SMEs and from the small scale to the medium and large scale enterprises,” Ajibola said.

To him, Nigeria had relied so much in oil and because of the monolithic economy, this sector was ignored.

“Banks can help by coming out to, more than before, faithfully support players in this lowest rung of the economic ladder. When supported to become more economically active, they can contribute in boosting economic activities to the benefit of the economy as a whole. Banks can do this without abandoning their roles at the top level and big ticket transactions, because all other sectors still need banks,” he stated.