Oil Sector Recovery Will Give Banks Relief – GTBank

• Oil Sector Recovery Will Give Banks Relief

With oil and gas loans accounting for about 30 percent of the total banking industry exposure, an improvement in oil sector receipts will provide relief for banks, enhance repayment of obligations and improve asset performance.

Guaranty Trust Bank Plc stated this in its ‘Macroeconomic and Banking Sector Themes for 2017’, which was released on Monday.

The lender noted that the banking industry had been plagued by declining asset quality in the wake of the fall in crude oil prices, devaluation of the naira and foreign exchange scarcity, with the ratio of non-performing loans rising to 11.7 per cent from 5.3 per cent in December 2015.

It said, “The downside, however, of continued challenges to production and evacuation of crude oil from the delta region will lead to further deterioration of asset quality and repayment defaults as reduced earnings weakens the ability of players to meet their scheduled repayment to banks.

“It is not unlikely that the Central Bank of Nigeria would extend more NPL forbearance for exposure to the most hit sectors of the recession, including oil and gas, power, general commerce, manufacturing, etc.”

GTBank added that with the Deposit Money Banks reeling under the pressure of naira devaluation and earnings challenges, capital adequacy buffers might have been eroded below the minimum regulatory requirement level.

According to the report, in view of the full compliance with Basel II in the computation of the capital adequacy ratio, and the possibility of further asset quality deterioration occasioned by loan loss provisioning implications, it is not unlikely that banks may have to raise additional capital to stay within the 15 percent minimum capital requirement of the CBN.

“There may then be considerations for a reduction in this requirement or forbearance as the current market conditions are unsuitable for a capital raise,” GTBank said.

It added that despite the beating that the Nigerian economy had taken in the last 24 months, “the fundamentals of the economy, which include the market size, population, enterprise competency of Nigerians, demographic, natural resources, etc., are still very strong.”

“In our opinion, the harmonisation and implementation of the right policies (both fiscal and monetary), that will optimise these fundamentals into stimulating economic activities and maximising productivity, appear to be the missing link,” it noted.