Banks’ll write-off about 26.6% of loan books in next 4yrs —EFG Hermes

LEADING Financial Services Corporation, EFG Hermes, has predicted that between 2020 and 2024, Nigerian banks will write-off an average of about 26.6 per cent of their loans due mainly to the economic crisis occasioned by the Coronavirus pandemic.

Based on certain assumptions, EFG Hermes which offers investment banking and non-bank financial services in 12 markets across 4 continents stated in its latest report that:”Given the magnitude of the macro-economic shock, the weaker starting point this time around for the economy and the sector, and the numerous uncertainties (both in the short term and medium term), we think there is a high probability of this scenario playing out.

“We estimate that our universe of banks would write-off about 26.6per cent of their loan books (on average) between Financial Year (FY) 2020-2024, which is nearly double the level of write-offs during the previous two cycles.”

However, the corporation noted that if there is a rapid recovery in the global economy, which could result in a significant bounce back in oil prices and subsequently lead to better-than-expected asset quality metrics, the above scenario is extremely unlikely based on current available data, adding that there is still a possibility that the macro-economic shock could be lower than expected.

“Thus, in our optimistic scenario, our assumed asset quality metrics translate to an average write-off of 7.1 per cent of the loan books of our banks. This is lower than the average write-off of 11.3 per cent during the previous two cycles. Under this scenario, we assume the average Non-Performing Loan (NPL) ratio increases by a modest 40bps Y-o-Y to 6.8 per cent in FY20e, before gradually declining to 4.8 per cent by FY24e,” the report read in part.

The Nigerian banking system has been through two major asset quality crisis in the past twelve years. They are: the 2009-2012 margin loan crisis, which resulted in the sector NPL ratio spiking from 6.3 per cent in 2008 to 27.6 per cent in 2009, and  the 2014-2018 oil price crash crisis, which resulted in the NPL ratio spiking from 2.3 per cent in 2014 to 14.0 per cent in 2016.

The firm noted that within its coverage universe of banks, the NPL ratio spiked from an average of 6.1 per cent in FY08 to 10.8per cent in FY09 and from 2.6per cent in FY14 to 9.1 per cent in FY16.

EFG Hermes during both cycles estimate that the banks wrote-off between 10-12 per cent of their loan book in constant currency terms. It further noted that given the potential macro-economic shock, real Gross Domestic Product (GDP) is expected to contract by four per cent; Naira/Dollar exchange rate is expected to devalue to a range of N420-N450 and  oil export revenue  expected to drop by up to 50 per cent in 2020.

It said, given the weak balance sheet positions of the regulator and the Asset Management Corporation of Nigeria (AMCON), “we think the risk of another significant NPL cycle is high.”

Moreover, these risks have been compounded by the Central Bank of Nigeria’s (CBN’s) erratic and unorthodox policies over the past five years, which have eroded the underlying profitability of the sector and made the banks more vulnerable to the current environment.

Given the numerous uncertainties (the pandemic, macroeconomic trajectory and regulatory response), “we have modelled three different asset-quality scenarios for our banks, which in turn have differing implications for the banks’ capital adequacy, growth rates and profitability.

According to the corporation, in the event that the pandemic ebbs away and macro-economic activity rebounds rapidly, “we think there is a possibility that the deterioration in credit quality will be far less pronounced.

“Thus, in our optimistic scenario (five per cent probability), we assume the average NPL ratio of our banks would increase from 6.4 per cent in FY19 to 6.8 per cent in FY2020 and moderate to 4.8per cent by FY2024.”

Under this scenario, it estimates the average cost of risk will spike to 4.2per cent in FY2020 before easing to 2.4per cent in FY2121 and average 0.9 per cent thereafter through the rest of its forecast period.

 

YOU SHOULD NOT MISS THESE HEADLINES FROM NIGERIAN TRIBUNE

Fresh Crisis Looms In APC •Party To Resolve 170 Petitions, May Dissolve State Excos
IF what is brewing in Lagos will hold true for many troubled state chapters of the All Progressives Congress (APC), the reconciliation bid of the national caretaker committee is likely to birth a fresh wave of crisis for… Read Full Story

Ajimobi’s Burial Site: Our choice of burial site not approved by Oyo govt —Family •We’ve granted them a waiver, but… —Govt
Fresh controversy over the final resting place of former governor of Oyo State, Senator Abiola Ajimobi emerged on  Saturday as sources close to the family accused the Oyo State government of not approving their choice place for the burial of the former governor… Read Full Story

APC Derailing From Founding Ideals — Tinubu
NATIONAL leader of the ruling All Progressives Congress (APC) has reviewed the development leading to the dissolution of the party’s National Working Committee (NWC) and sounded an alarm bell that the party is derailing from its founding ideals… Read Full Story

UPDATE: Oyo State goes after private hospitals •Seals 5 clinics over quackery, more to follow
OWNERS of private medical facilities operating under unprofessional conditions are in trouble in Oyo State as the government, on Saturday, said it has sealed five private health facilities in Saki and Ibadan metropolis over unprofessional and illegal practices… Read Full Story

We’re Not Responsible For Delay In Ajimobi’s Burial ― Oyo Govt
The Oyo State Government has strongly denied insinuations that it is responsible for the delay in burying the immediate past governor of the state, Senator Abiola Ajimobi, who died on Thursday… Read Full Story

Deliver Edo, Ondo, Buhari tasks APC governors
PRESIDENT Muhammadu Buhari has given governors of the All Progressives Congress (APC) the marching order to reclaim Edo State from the Peoples Democratic Party (PDP), following its recent flipping to… Read Full Story

Adam’s Second Fall On The Eve Of EdoEN Election
SINCE its formation, the various political tendencies that came together under the aegis of the governing All Progressives Congress (APC) have found it difficult to evolve as a compatible ideological whole. Critics of the party have levelled a charge that APC was hurriedly put together to grab power and was consequently… Read Full Story

Edo, Ondo Elections: Whither The Opposition Parties?
In February this year, the Independent National Electoral Commission (INEC) ‘sanitised its register by retaining only 18 political parties. A total of 74 parties were axed by the commission as empowered by extant laws. The exercise came against the complaints from many quarters on the huge number of parties in… Read Full Story

Ajimobi: Last Supper With A Sanmonri, Constituted Into Authority
UNLIKE my wont, words failed me repeatedly this morning. Ever imagine billows of smoke failing to sprout out of the blacksmith’s forge? Or the canary suddenly failing to spit its melodious rhythm? But that has been my abiding forte in the last one hour or so. Writing, cancelling, rewriting, erasing, rewording and cancelling… Read Full Story

ONDO GOV ELECTION: Who Gets The Ticket In PDP?
AS the October 10 governorship election draws near in Ondo state, the people of the state are gearing up and studying political events in the state, it is apparent that the Peoples Democratic Party (PDP) is working hard to give the ruling All Progressives Congress (APC) a good fight in the election and take over power in the state… Read Full Story

FAAN Holds Dry Run Airport Simulation Exercise At Lagos, Abuja Airports
The Federal Airports Authority of Nigeria (FAAN) has held dry run simulation exercises at domestic terminals of the Nnamdi Azikiwe International Airport, Abuja and Murtala Muhammed Airport, Lagos… Read Full Story

You might also like
Comments

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More