Analysts fret Banks’ asset quality could deteriorate on oil price volatility
Analysts fret that global geopolitical uncertainties and crude oil price volatility could balloon banks’ Non Performing Loans (NPLS).
Tier- 2 lenders are exposed to oil and exchange shocks because they lack the capital buffers to withstand the headwinds. The tier- 1 lenders, excluding First Bank, have significantly reduced dollar-denominated debts in their capital structure.
When oil price dropped to an all-time low of around $36 per barrel in 2016, the country entered into its first recession in the quarter of century and banks’ NPL ratio spiked to 10.72% in Q2 2016 from 3.65% in Q3 2014- when oil price was above $100 per barrel. The plummet in oil price saw the NPL quadruple from N398.7 billion to N1.67 trillion in the space of two years.
Despite the rally in oil price driven by OPEC’S output cut in 2017, the NPL
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(Team lead: BALA AUGIE ratio failed to improve as it rose further peaking at 15.13% in Q3 2017, the highest so far since Q2 2011.
Although since Q4 2014, the NPL has been improving at a slow pace, analysts are concern that there might be a reversal of this downward trend.
“The behaviour of NPL this year largely depends on how the economy performs. If there is stronger economic recovery but the economy is threatened, one of it is unstable oil price which could impact negatively on banks’ NPL. If oil price drops below its current level, it will have a large effect on revenue of oil companies” Johnson Chukwu, CEO Cowry Asset Management Limited told Businessday,
“If the economy grows stronger, we should expect the capacity of companies to meet their obligations to banks is good, and NPL loans. A lot is tie to the performance of the economy most especially oil price”, said Chukwu.
Asset quality in the Nigerian banking industry remained a concern in 2018 as industry NPLS stayed elevated at 14.2% as at Q3-18 (lower than 15.1% in Q3-17 but higher than 12.5% in Q218), according to the NBS.
A research analyst at Proshare Limited, Saheed Kiaribe opined that the unavailability of data for Q4 2018 beclouds the outlook of NPL in 2019. However, he asserted that given the happenings in Q4 2014, NPL ratio might go beyond the 14.16% recorded in Q3 2018.
- Analyst: DIPO OLADEHINDE, ENDURANCE OKAFOR, BUNMI BAILEY Graphics: SAMUEL IDUH )