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Though Zenith Bank’s result for full year 2017 was impressive in both top-line and bottom-line, showing a measure of resilience, the bank recorded heightened provision for bad loans, a development which industry experts say would signpost most results in the industry to be announced starting this week.

Moreover, the analysts believe Zenith Bank’s resilience in turning out impressive top-line and bottom-line would not be replicated by many banks, thus indicating that increased impairment losses would come with erosion of bottom-line.

According to Ayodele Akinwunmi, Head of Research at FSDH Merchant Bank Limited, the results of other banks would show marked difference from that of Zenith Bank.

He stated: ‘‘I expect the Non-Performing Loans (NPL) to increase across the industry because of the waek economic situation in the country particularly drop in oil price and oil production, rising inflation rate, weak purchasing power and the devaluation of the Naira. In addition, in a regime of high interest rate just as we saw from June 2016 banks that are net takers of fund in the market will incure huge interest expenses.’’


Deterioration of credits

Other banking industry analysts indicated that this downturn has resulted in the deterioration of credits in the banking sector with strong potential of capital erosion, noting that though many commercial banks have reacted by shutting down new credit to the real sector, further worsening of already bad loans will negatively affect capital in 2017.

Industry data sourced from the Central Bank of Nigeria, CBN, and exposed by Cardinal Stone Partners, a Lagos based investment house, shows that about 42 per cent (N5.2 trillion) of total loans from leading banks in the coverage are exposed to sectors facing either a structural or cyclical economic challenge.

Cyclical challenges are business challenges stemming from economic cycles of expansion (growth) and contraction (recession)


According to the data Guaranty Trust Bank Plc (GTB), United Bank for Africa Plc (UBA) and Diamond Bank Plc have the most relative exposure to these sectors while Access Bank Plc, Fidelity Bank Plc and Sterling Bank Plc have the least relative exposure.

Analysts at Cardinal Stone Partners stated: ‘‘We believe the relative exposure (loans to these sectors as percentage of total loans) of each bank gives a sense of the vulnerability of the banks in our coverage to current systemic risk.

‘‘The current macroeconomic trend which poses threats to the banking sector necessitates an evaluation of the possible effect of a further worsening of banks’ loan books on earnings and capital adequacy.’’


Oil & Gas sector headaches

Many banks have reported a restructuring of a significant portion of their loans to the upstream oil & gas sector in 2016 and also adopted conservative crude oil prices  in the assumptions used for the restructuring.

First City Monument Bank Plc (FCMB), GTB, First Bank of Nigeria, Fidelity Bank and Sterling Bank maintained a relative exposure higher than industry average of 16.8% of total loans to the upstream oil & gas sector; while UBA, Zenith Bank, Diamond Bank and Access Bank have exposures below the industry average.

The overall absolute exposure of top 10 banks to the upstream oil & gas sector stood at N1.9 trillion ($6.4 billion) in 2016.

Cyclical challenges to asset quality: The general commerce and manufacturing sectors (which accounts for 26.2% of total banking sector loans) currently suffers from the negative economic cycle created by foreign exchange illiquidity.

Hence, banks are losing business in generating new credit assets for fear of bad loans or losing capital to bad loans provision.

The general commerce sector accounts for 9.2% of the industry’s NPLs.

The manufacturing sector contributes 8.0% to industry’s total NPL with GTB topping the chart for both relative (36.0%) and absolute contribution (N24.7 billion).

First Bank ranks second with an absolute contribution of N12.2 billion despite its low relative contribution (2.3%).

Loan growth to remain tepid, earnings to be supported by high yielding government securities

According to financial analysts, the risk appetite of the banking industry moved from being moderate to being extremely conservative in 2016.

Household incomes

As output of major economic sectors and household incomes shrank due to the economic recession, commercial banks prioritised capital preservation. Only a few banks grew risk assets organically in 2016.

From their interim results, it is observed that banks such as Access with real loan growth of 14.4% and Fidelity with real credit growth of 16.9% and with fairly better asset quality metrics than peers took advantage of on lending facilities to state governments to create risk assets.


2017 bank credit outlook

Analysts at Cardinal Stone stated: ‘‘We believe the outlook for loan growth in 2017 remains bleak given aggressive budget borrowing to augment federal government’s revenues which will sustain the attractiveness of government securities.

‘‘Also, with heightened business risk as a result of inadequate FX supply and uncertain FX outlook, the coast is not clear for aggressive lending by banks.

‘‘Therefore, in our opinion, we believe commercial banks will continue with current approach – monitoring, restructuring and possibly winding down their loan exposures as long as yields remain high and FX uncertainty persists.

‘‘Similar to the trend of 2016, we expect, the major contribution to loan growth to be the impact of FX devaluation on FX denominated loans.’’

Fixed, Treasury income to remain golden in 2017

The 2017 budget deficit would ensure yields on government securities remain high in the interim.

Major banks who are net placers of funds would take huge advantage of this to grow their top-line and bottom-line, and that was what happened in Zenith Bank going by its 2016 results announced last week.

The current high yield on government securities, according to industry analysts, is one of the major streams of revenue that supported bank’s profitability in 2016.


The average contribution of government securities to total earnings is17% across the banks with UBA having the highest relative contribution of 24% while GTB’s contribution is the lowest at 11%. This implies that the outlook of the yields on government securities remains a major determinant of profitability in 2017.

To put in perspective, yields of government securities in pre-tightening era in Q4’15 was as low as 6.4% and the yield on one year government paper has almost tripled in one year to about 22%. Hence, if yields were to return to their previous level, the banking industry may lose over half its revenue inflow from government securities.

Government securities

Industry analysts believe the tightening stance of the Monetary Policy Committee (MPC) of the CBN and the incessant CBN liquidity mop up is primarily driven by the need to regulate the current forex pressure as it tends to keep yields high in order to entice foreign investors and lower system liquidity so as to discourage Forex speculation and possible round-tripping.

Consequently, a treasurer at Stanbic IBTC Bank stated, ‘‘as long as the Forex scarcity persists, we believe the CBN will maintain its tightening stance and yield will remain high in 2017. Furthermore, the dire need to finance government expenditure in 2017 through local borrowings also enhance the probability that rates may remain high.’’

Most bank treasurers do not expect any material decline in yields at least in the first half of 2017 and therefore they expect income levels from government securities to remain relatively stable.

Profiting from FX Revaluation

…GTB, FCMB, FBN lead the pack


Following the 50% devaluation of the Naira mid 2016, forex revaluation gains became a major part of bank’s income.

From their interim reports GTB, FCMB and First Bank benefited immensely as revaluation gains contributed 28.4%, 25.1% and 16.4% of gross revenue as at third quarter 2016, respectively. Access Bank is one of the few banks that recorded revaluation losses and this is because of the bank’s off-balance sheet derivative swap ($800 million) which effectively made their balance sheet short on the USDollar. However, the income of N96.3 billion from the derivative swap more than compensated for the forex revaluation loss of N53.7 billion.

Some other banks like Zenith, UBA and Diamond were caught off guard in June when the Naira initially depreciated to N282/$ from N199/$.


Industry sources, however, said these banks have repositioned their balance sheets to benefit from the subsequent devaluation in the third quarter 2016. But analysts’ near-consensus is that the current exchange rate of N305/ USD1 is not the equilibrium level given weak traded volumes and the CBN’s continued intervention.

In November last year, the interbank market briefly traded freely as the CBN intervention was minimal during this period. Hence, the exchange rate trade as low as N375/$ at the interbank market. Also, the Senate adoption of N350/$ as the benchmark for the Medium Term Expenditure Framework (MTEF), signaling that the lawmakers believe the CBN’s interbank rate is currently not at equilibrium level yet.


On this premise, analysts believe income from forex revaluation gains may not be over.

From the analysis, the forex revaluation gains is far from over, and analysts see GTB to be the best positioned in the event of a further devaluation because for a low of N350/$, the bank will earn N63.3 billion ($207.5 million) in revaluation gain. Zenith, FCMB and First Bank are also well positioned to benefit immensely from a further devaluation with possible gains as high as N49.6 billion ($162.6 million), N33.3 billion ($109. million) and N33.0 billion ($108.20 million) respectively at N350/$.


Though Access Bank balance sheet seems like it is not adequately positioned to benefit from any further devaluation, it has off balance sheet derivative assets worth over $800 million. The gains from this derivative instrument has forex gain and interest income component which implies that the bank will benefit from both forex revaluation gains in the case of a devaluation as well as interest income.


Whilst the value of the expected income from the derivative asset may be difficult to estimate (given the unavailability of details of the swap transaction), the trend in the bank’s financial report shows the income from the derivative asset significantly exceeds its forex devaluation losses.




Source Link: http://www.vanguardngr.com/2017/03/banking-sector-economic-factors-pressure-n5-2trn-risk-assets/


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