High concentration of credit in oil, gas and power sectors is taking a toll on banks following a shift to Basel II and the revision of capital computation rules by the Central Bank of Nigeria (CBN).
Many local exploration and production companies borrowed money from banks to acquire and develop assets offloaded by foreign firms.
The majority of the debtor companies had based cash flow between $65 and $70 per barrel but the price of oil has fallen to $50 compelling banks to restructure loan portfolios by extending tenors to match new cash flow projections.
Huge loan portfolios together with the shift to Basel II and revised capital computation have added more pressure on banks’ capital.
Banks have resorted to cost cutting measures such as staff downsizing, rationalisation of branch network, reduction in loans growth, and short term trade financing.
Investigation showed that non-performing loans (NPLs) collectively estimated above N4 trillion is higher than the CBN’s informal sealing of 5 per cent of gross loans stock for each bank.
With over N2.2 trillion (40 percent of gross loans by third quarter of 2014), First Bank has the highest exposure to oil and gas ahead of GTBank and Fidelity Bank with 28 per cent of gross loans each.
Other banks ranked high on oil and gas loans exposure by a recent research by Ecobank are Skye Bank (27 per cent), Access Bank (25 per cent), Diamond Bank (25 per cent), Zenith Bank (18 per cent), Ecobank (18 per cent), United Bank for Africa (16 per cent), and First City Monument Bank, FCMB (14 per cent).
FBN Holdings has cut down on loan growth from 23 per cent in 2014 to 4 per cent, and shifted focus to short term trade financing with typical 90-day cycles, instead of long-term credit.
“In the past we would do term loans of two years but this year we would focus on trade finance,” explained FBN Holdings Chief Executive Officer (CEO), Bello Maccido.
Fidelity Bank has laid off 150 workers but also promoted a handful.
Ecobank sacked 500 as part of measures to grapple with the pressure of NPLs made worse by the shift to Basel II and revision of capital computation rules.
The bank shut down some branches, particularly those on rented property with heavy rent liabilities without matching earnings prospects.
The NPL of FCMB, which has14 per cent of gross loans in oil and gas, is likely to worsen as the bank plans to expand lending in what Fitch Ratings views as inherently high-risk retail and small and medium scale enterprise (SME) segments.
Constrained by its small but evolving full service banking franchise, FCMB’s capitalisation and assets quality are expected to weaken in the medium term, driven by loans growth, coupled with a high cost-to-income ratio.
Fitch Ratings considers funding and liquidity as the bank’s weaknesses, with the regulatory liquidity ratio being one of the lowest in the sector, and the loan-to-deposit ratio close to 80 per cent.
