If you are a Nigerian bank, then it pays to be big. As more Full Year(FY) 2015 results of deposit money banks are being released, analysts say the large tier one banks will be in a better position to navigate the growing problem of bad loans.
This is as the Nigerian economy grew at the slowest pace in a decade last year. “From an asset quality view point, we remain more concerned about the tier 2 banks, given that they are relatively more exposed to lower quality names and have less earnings buffers, to take on additional asset quality stress,” said Adesoji Solanke, a banking analyst at Renaissance Capital in a note to investors on March 15.
The five tier one banks control nearly 60 percent of the total industry loan book. Recent results from three of the top five banks seem to validate this thesis.
Guaranty Trust Bank(GTB), Nigeria’s largest bank by market value, reported that its Full year 2015 net income increased by 5.29 percent to N99.43 billion from N94.43 billion, the previous year.
Impaired loans and advances as a percentage of total loans was 3.21 percent, up marginally from 3.15 percent in 2014. UBA, another top tier lender reported that its FY 2015 net income increased by 24.53 percent to N59.65 billion, from N47 billion as at December 2014, while Zenith Bank reported FY 2015 net income up 6.2 percent to N105.5 billion and NPL ratio at a low 2.2 percent.
The results will come as a relief to some investors, following a string of profit warnings from lenders, including tier one bank FBNHoldings, and second tier lenders FCMB and Diamond Bank.
Fears of a surge in bad loans have been expressed by regulators and rating agencies.
Data from the Central Bank of Nigeria (CBN) shows that the number of banks with NPL ratios in excess of the 5 percent threshold increased from three to eight.
Furthermore, NPL in three of these banks exceeded 10 percent, while NPLs rose in 18 of the 22 buckets into which the CBN classifies Deposit Money Bank (DMB) lending.
“I cannot help but remain concerned about the possibility of under-reporting of NPLs.
The weakened ability of the CBN, represented by the structure of its balance sheet to deal with a recurrence of crisis in the banking sector requires heightened vigilance by Bank Staff,” Doyin Salami, an economist and member of the CBN Monetary Policy Committee (MPC), said in his minutes from the last meeting held in January.
Salami says worsening NPLs reflect a combination of external and internal factors which include: low and volatile oil prices; uncertainty about severe fiscal imbalance at the sub-national level of government; weak output growth; and eroding investor confidence. Oil prices which have recovered somewhat to the $40per barrel mark are still down from a peak of over $100 in 2014.
In Nigeria, 24 percent of banking system loans is related to the oil and gas sector. Nigeria’s economy grew at 3 percent in 2015, the slowest pace since 1999.
Moody’s in a recent report, says the risk of mutually reinforcing negative pressure between different parts of the economy and the banks is growing. The tight liquidity hurts banks’ asset-liability management and the cost of foreign currency funding reduces their profitability.
However, banks such as Access Bank Plc (Ba3 stable, b211),Guaranty Trust Bank Plc (unrated) and Zenith Bank Plc (unrated)should benefit from their strong corporate client relationships and withstand the tight dollar liquidity better than their peers,” Akintunde Majekodunmi, Vice President –Senior Analyst at Moody’s said.