‘Nigerian banks better positioned to weather anticipated economic recession’

ON account the lower incidence of Non-Performing Loans (NPLs), a Lagos-based research and investment firm, Cowry Assets Management Limited has said that Nigerian banks are better positioned to weather the anticipated economic recession arising from threats of COVID-19 and crash in global crude oil prices, specifically, the firm observed that the lower incidence of Non-Performing Loans (NPLs) suggests that the lenders have developed greater loan administration capacity over time and are, in the short term better positioned.

The risk of a rise in bad loans may be also mitigated by the ability of borrowers to refinance previously expensive loans with now cheaper credit in a low interest rate regime, it stated in an advisory noted to clients.

“However, only banks with surplus dollar asset positions may be better equipped to withstand another likely devaluation of the exchange rate which could hamper dollar-based loan repayments.

“We therefore warn that a protracted weakness in global crude oil prices could set the Nigerian financial system back to 2016/2017 crisis period when NPL ratio peaked at 15.13 per cent – more than thrice the regulatory NPL limit of five per cent,” the note read in part.

Recently released banking sector statistics showed greater efficiency in Nigeria’s financial intermediation, particularly with respect to improved loan administration and increased mileage on the road to achieving a cashless economy in 2019.

One of such data, from the National Bureau of Statistics, revealed that banking sector non-performing loans (NPLs) declined year-on-year by 40.75 per cent to N1.79 trillion at December 2019.

This was in spite of a 13.75 per cent increase in loans and advances to N17.19 trillion  occasioned by a directive from the Central Bank of Nigeria  to deposit money banks to increase their loans to deposit ratio to 65 per cent by the end of 2019.

Hence, NPL ratio declined to 6.17 per cent at the end 2019 compared to 11.82 per cent as at the end of 2018–suggesting a general improvement in loan administration to most economic sectors (ten out of fourteen major sectors).

According Cowry Assets Management Limited, Banks, in some cases, recorded lower NPL ratios in some economic sectors despite increasing their level of credit exposure to businesses in those sectors.

Remarkably, the Oil & Gas sector which gulped the bulk of bank loans at 26.64 per cent (following an 18.68 per cent y-o-y increase in risk assets to the sector) recorded a plunge in NPL ratio to 4.79 per cent at the end of 2019 (from 22.77 per cent at the end of 2018).

Similarly, the manufacturing sector which accounted for 15.26 per cent of total loans (following a 17.59 per cent y-o-y increase in risk assets) witnessed a moderation in NPL ratio to 3.93 per cent at the end of 2019 (from 5.83 per cent at the end of 2018).

In a few other cases where the level of NPL ratio increased with increased risk asset creation, the Agricultural sector which accounted for 4.49 per cent of total loans (following a 26.59 per cent boost in risk assets) saw an increase in NPL ratio to 6.67 per cent at the end of 2019 (from 5.95 per cent at the end of 2018).

Also, Construction sector which accounted for 4.21 per cent of total loans (following a 17.68 per cent increase in risk assets) recorded an increase in NPL ratio to 11.95 per cent at the end of 2019 from 8.44 per cent at the end of 2018.

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