Report: Nigerian Banks Still Heavily Exposed to Oil Sector

• 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.