THERE are fears in the financial system that the effects of the new wave of Coronavirus leading to the signing of COVID-19 Health Protection Regulations will affect banks’ profitability as cost of risk remains high and some of the restructured loans of the affected lenders likely to go bad.
President Muhammadu Buhari signed the COVID-19 Health Protection Regulations 2021 into law. According to the new legislation, anyone found to have breached Covid-19 safety protocols risk going to jail for 6 months or paying a hefty fine or both.
Some financial sector experts had earlier expressed fears that the measures as contained in the newly signed law will have severe implications for Nigerian lenders.
EFG Hermes, a leading financial service corporation in Frontier Emerging Markets (FEM), says Nigeria’s leading banks’ earnings in 2021 will remain under pressure in the near term, on the bias that the cost of risk will remain elevated at 1.6 per cent as the macro and regulatory environment remains weak coupled with some of the restructured loans of the affected banks to become Non-Performing Loans once their forbearance period ends.
In its recent report, the investment banker also predicted that total sector assets will drop on average by 0.8per cent, as banks remain risk-averse and some of the liquidity the sector attracted last year exits the system.
It further noted that a 4.2 per cent year on year( Y-o-Y) decline in aggregate non-interest revenue is possible due to no recurrence of exceptional revenue (loan loss recoveries, FX revaluation gains, etc.)
For Nigerian based Augusto and Co., the pandemic will weaken the banking industry’s asset.
“We believe the COVID-19 pandemic will weaken the banking industry’s asset quality in view of the expected impact on the finances of state governments, the performance of businesses and the purchasing power of households,” it stated.
Although the degree of the impact will vary across different sectors, key sectors that will bear the brunt are oil and gas (upstream and services), real estate, construction, transportation (aviation) and manufacturing (non-essentials).
The sectorial distribution of the Industry’s loan portfolio according to Augusto will also determine the extent to which asset quality will deteriorate in the near term.
Specifically, the ratings agency noted that the Industry’s exposure to vulnerable sectors threatens asset quality in the short term for the following reasons.
“The decline in global crude oil prices elicited by a slump in demand will result in lesser revenues for oil and gas firms and the government as crude oil proceeds account for about 60per cent of the sovereign’s revenues and 95per cent of the country’s export proceeds.
“An anticipated further devaluation of the naira will bloat the Industry’s foreign currency loan book, which is dominated by the oil and gas, manufacturing, general commerce and other import dependent sectors. This could weaken capitalization ratios via higher risk weighted assets and increase the level of delinquent FCY loans.
“The disruption in the global supply chains is expected to increase demand for domestic alternatives for inputs used in the manufacturing sector. While this is good for the domestic market, the higher cost implications will adversely impact the margins of producers as increased costs are not easily transferable to final consumers especially in a period of weakened consumer purchasing power.
“Earnings from the Industry’s core business will decline in the short term on account of an expected rise in impairment charges, lower yields on the loan book and a contractionary monetary policy stance, exacerbated by discretionary cash reserve requirement (CRR) debits by the regulator,” the company stated in its report on the effects of COVID-19 on the banking sector.
According to Augusto & Co, the interest rate on Federal Government of Nigeria (FGN) intervention funds (granted through BOI and CBN) to targeted sectors, which account for about 10 per cent of the loan portfolio was reduced by 400 basis points to five per cent in March 2020, as part of the palliatives to support businesses.
This translates to a 300 basis points decline in yields on such loans for banks.
The research report from EFG Hermes downgraded Stanbic IBTC to Neutral (TP: NGN39.1) on the bias it believed the business units will come under regulatory pressure.
Nigeria’s most valuable bank, GTBank was downgraded to neutral (TP: NGN33.2), on the consideration of declining leverage and macro/regulatory-induced headwinds to its Return on Equity (ROE) outlook.
However, EFG Hermes,
research analysis, upgraded Union Bank, UBA, First Bank, Zenith Bank to Buy.
The Investment banker upgraded its rating of Nigeria’s most profitable bank, Zenith to Buy (from Neutral; TP: NGN29.1) on the bias that it expects a more resilient Return on Equity outlook due to continued strong trading income and lower risk charge.
FBN (TP: NGN10.6) and UBA (NGN10.4) was also upgraded to Buy (from Neutral) due to a decline in risk charge forecasts and strong fee income growth for the former and strong non-Nigeria profit contribution for the latter.
Furthermore, Access Bank rating was upgraded to Neutral (TP: NGN9.7), from Sell, due to stronger-than-expected asset growth and lower risk charge.
Looking ahead, given other macro challenges and the Nigerian apex bank’s priorities, the research report predicts the regulator will continue to adopt a more lenient policy on recognition and provision of NPLs. .
Officially, the cash reserve requirements (CRR) for banks is 27.5per cent, but the effective CRR for some banks are as high as 50 per cent due to the CBN’s non-refund policy and the discretionary excess debits seen in the last few months.
Available records show that penalties for breaching the minimum loans-to-deposit ratio (LDR) implemented as additional CRR debits also contributed to the spike. Thus, restricted funds with the CBN account for as high as 15per cent of total assets and are non-earning.
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