An­a­lysts fret Banks’ as­set qual­ity could de­te­ri­o­rate on oil price volatil­ity

Business Day (Nigeria) - - REAL SECTOR WATCH - IS­RAEL ODUBOLA AND SE­GUN ADAMS BMI pro­vides in-depth anal­y­sis and data on in­dus­tries, com­pa­nies, stocks, cur­ren­cies, fixed in­come/credit, eco­nom­ics, reg­u­la­tion and fac­tors that in­flu­ence in­vestor’s de­ci­sion-mak­ing

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


(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.


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