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Report: Nigerian Banks Still Heavily Exposed to Oil Sector

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  • Report: Nigerian Banks Still Heavily Exposed to Oil Sector

Despite the sustained increase in crude oil price seen this year, the banking sector remains heavily exposed to the oil and gas sector, a report has revealed.

Lagos-based CSL Stockbrokers Limited, a research and financial advisory company, stated this in a report titled, ‘Tier 2 Banks- Emerging Rays of Silver Lining,’.

However, while the report noted that the risk to the oil and gas upstream sector appears to be reducing, it pointed out that Nigeria’s power sector was still boded with high risk due to myriad of problems confronting the sector.

Although, the report did not specify the present value of banking sector exposure to the oil and gas sector, the Central Bank of Nigeria (CBN) had revealed that it constituted about 40 per cent of banks’ loan portfolio.

But the Chief Executive of Financial Derivatives Company Limited, Mr. Bismarck Rewane, while reacting to the report’s findings, attributed the situation to the restructuring of the facilities.

“Banks are now restructuring those facilities,” he added.

These could be part of the reasons why commercial banks have remained apathetic towards lending.

Continuing, the report anticipated that Nigerian banks would not replicate the spectacular performance it witnessed in 2017, after the economy exited a biting recession.

The report stated: “Increasing levels of non-performing loans (NPLs) in the books of some banks in the aftermath of the recession amid poor macro-economic conditions caused most banks to put a rein on credit growth in 2017.

“As at first quarter 2018, the tier-2 banks within our coverage reported decline in loans by an average of three per cent.

“Most banks deployed more funds to the high yielding and less risky fixed income market. However, based on communication from the banks, moderating fixed income yields should compel banks to create more risk assets.”

It projected an average loan growth of about 11 per cent for the tier-2 banks within our coverage and we expect most of the loan growth to take place in the second half of the year.

“We do not expect significant deterioration in asset quality this year as oil prices appear to be favourable and foreign exchange liquidity remains robust following the introduction of the Investors and Exporters’ (I&E) window last year,” it added.

The Nigerian banking sector adopted the International Financial Reporting Standard (IFRS) in 2012.

IFRS 9 prescribes new guidelines for the classification and measurement of financial assets and liabilities, making fundamental changes to the methodology for measuring impairment losses, by replacing the “incurred loss” methodology with a forward-looking “expected loss” model.

For the tier-2 banks, the report noted attempts by many of them to raise debt capital to shore up their capital base, saying it was expected to result in an increase in funding costs this year.

According to it, “The trend in non-interest income growth has been southwards over the last three years during which the CBN implemented a gradual phase-out of commission on turnover (CoT).

“Interestingly, some of the banks, especially the larger ones, have managed to claw back commissions through other channels. The mid-tier banks on the other hand have found it more difficult to do same.

“Card fees also took a hit on account of restriction on dollar card transactions. Nigerian banks were forced to reduce (and in some cases suspend) forex transactions on their Automated Teller Machine cards (debit and credit) in the face of acute dollar shortage precipitated by shrinking petrodollars, tighter FX policies and reduced portfolio inflows.

“Capital adequacy is a persistent issue for a number of Nigerian banks. Regulatory capital ratios were impacted by the depreciation of the naira given the extent of dollar lending in the sector. They were also hit by a sharp rise in impairments in some cases.”

The CBN requires that banks with international subsidiaries maintain a capital adequacy ratio (CAR) of 15 per cent, while banks without international subsidiaries maintain a CAR of 10 per cent. The minimum requirement for systemically important banks is 16 per cent.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

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Oil Dips Below $62 in New York Though Banks Say Rally Can Extend

Oil retreated from an earlier rally with investment banks and traders predicting the market can go significantly higher in the months to come.

Futures in New York pared much of an earlier increase to $63 a barrel as the dollar climbed and equities slipped. Bank of America said prices could reach $70 at some point this year, while Socar Trading SA sees global benchmark Brent hitting $80 a barrel before the end of the year as the glut of inventories built up during the Covid-19 pandemic is drained by the summer.

The loss of oil output after the big freeze in the U.S. should help the market firm as much of the world emerges from lockdowns, according to Trafigura Group. Inventory data due later Tuesday from the American Petroleum Institute and more from the Energy Department on Wednesday will shed more light on how the Texas freeze disrupted U.S. oil supply last week.

Oil has surged this year after Saudi Arabia pledged to unilaterally cut 1 million barrels a day in February and March, with Goldman Sachs Group Inc. predicting the rally will accelerate as demand outpaces global supply. Russia and Riyadh, however, will next week once again head into an OPEC+ meeting with differing opinions about adding more crude to the market.

“The freeze in the U.S. has proved supportive as production was cut,” said Hans van Cleef, senior energy economist at ABN Amro. “We still expect that Russia will push for a significant rise in production,” which could soon weigh on prices, he said.

PRICES

  • West Texas Intermediate for April fell 27 cents to $61.43 a barrel at 9:20 a.m. New York time
  • Brent for April settlement fell 8 cents to $65.16

Brent’s prompt timespread firmed in a bullish backwardation structure to the widest in more than a year. The gap rose above $1 a barrel on Tuesday before easing to 87 cents. That compares with 25 cents at the start of the month.

JPMorgan Chase & Co. and oil trader Vitol Group shot down talk of a new oil supercycle, though they said a lack of supply response will keep prices for crude prices firm in the short term.

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Crude Oil

Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

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Oil Prices Rise With Storm-hit U.S. Output Set for Slow Return

Oil prices rose on Monday as the slow return of U.S. crude output cut by frigid conditions served as a reminder of the tight supply situation, just as demand recovers from the depths of the COVID-19 pandemic.

Brent crude was up $1.38, or 2.2%, at $64.29 per barrel. West Texas Intermediate gained $1.38, or 2.33%, to trade at $60.62 per barrel.

Abnormally cold weather in Texas and the Plains states forced the shutdown of up to 4 million barrels per day (bpd) of crude production along with 21 billion cubic feet of natural gas output, analysts estimated.

Shale oil producers in the region could take at least two weeks to restart the more than 2 million barrels per day (bpd) of crude output affected, sources said, as frozen pipes and power supply interruptions slow their recovery.

“With three-quarters of fracking crews standing down, the likelihood of a fast resumption is low,” ANZ Research said in a note.

For the first time since November, U.S. drilling companies cut the number of oil rigs operating due to the cold and snow enveloping Texas, New Mexico and other energy-producing centres.

OPEC+ oil producers are set to meet on March 4, with sources saying the group is likely to ease curbs on supply after April given a recovery in prices, although any increase in output will likely be modest given lingering uncertainty over the pandemic.

“Saudi Arabia is eager to pursue yet higher prices in order to cover its social break-even expenses at around $80 a barrel while Russia is strongly focused on unwinding current cuts and getting back to normal production,” said SEB chief commodity analyst Bjarne Schieldrop.

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Crude Oil

Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

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Crude Oil Rose Above $65 Per Barrel as US Production Drop Due to Texas Weather

Oil prices rose to $65.47 per barrel on Thursday as crude oil production dropped in the US due to frigid Texas weather.

The unusual weather has left millions in the dark and forced oil producers to shut down production. According to reports, at least the winter blast has claimed 24 lives.

Brent crude oil gained $2 to $65.47 on Thursday morning before pulling back to $64.62 per barrel around 11:00 am Nigerian time.

U.S. West Texas Intermediate (WTI) crude rose 2.3 percent to settle at $61.74 per barrel.

“This has just sent us to the next level,” said Bob Yawger, director of energy futures at Mizuho in New York. “Crude oil WTI will probably max out somewhere pretty close to $65.65, refinery utilization rate will probably slide to somewhere around 76%,” Yawger said.

However, the report that Saudi Arabia plans to increase production in the coming months weighed on crude oil as it can be seen in the chart below.

Prince Abdulaziz bin Salman, Saudi Arabian Energy Minister, warned that it was too early to declare victory against the COVID-19 virus and that oil producers must remain “extremely cautious”.

“We are in a much better place than we were a year ago, but I must warn, once again, against complacency. The uncertainty is very high, and we have to be extremely cautious,” he told an energy industry event.

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