Commercial banks shun impairment charges for losses over improved loans repayment

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By Kayode Tokede

Commercial banks in Nigeria have reduced bad loans provision in 2018 over stability in global oil prices that has improved loans repayment, our correspondent can report.

Findings show that 10 commercial banks investigated by Nigerian NewsDirect recorded decline in bad loans provision  (impairment charges  for losses) in 2018 financial year.

Opposing the implementation of the International Financial Reporting Standard (IFRS) 9 by the International Accounting Standards Board (IASB), to increase impairment charges, lower provisions have been made by these commercial banks operating in the country.

These 10 commercial banks in 2017 reported an accumulative N544.6 billion loan loss provision as against N235.75 billion in 2018.

The 10 commercial banks involved are Ecobank Transnational Incorporated Plc (ETI), FBN Holdings, United Bank for Africa (UBA) Plc and Sterling Bank among others.

The breakdown by Nigerian NewsDirect revealed that ETI reported 34.8 per cent  loan loss provision in 2017 from N125.89 billion to N82 billion in 2018.

FBN Holdings reported 42 per cent decline in loan loss provision to N86.9 billion in 2018 from N150.4 billion in 2017.

FBN Holdings had explained to investors/analysts that “impairment charge for losses declined by 42.2per cent to  N86.9 billion in 2018 (2017: N150.4 billion) as we continue to focus on remediation and recovery activities towards improving asset quality.

“Consequently, cost of credit risk decreased to 3.5per cent (2017: 6.4per cent).

“We remain committed to materially resolving legacy non-performing loans and achieving a single digit NPL ratio in the current financial year.”

In addition to Tier-1 bank loans loss provision, UBA reported 86 per cent decline in loans loss provision to N4.5 billion from N32.9 billion reported in 2017.

Unity Bank last year reported N161.2 million impairment charges  for losses, 99.6 per cent decline from N44.25billion reported in 2017.

Responding, the head of research, PanAfrican Capital Plc, Mr. Moses Ojo, attributed the decline in commercial banks’ impairment charges for losses to increase in global oil prices that have aided loans recovery.

According to him, “This is as a result of the increase in the prices of crude oil in 2018 relative to the previous year.

“In 2018, Brent Crude Oil traded at an average price of $69.54 per barrel, up by 27.18per cent relative to $54.68 per barrel in 2017.

“The Nigerian lenders were able to recover some of their loan loss assets that have been previously classified as bad. Hence, the decline in the impairment charges in the period,” he explained.

Market watchers have expressed that commercial banks deliberately reduce impairment charges for losses to boost profitability, stating that 2018 was not a profitability year for commercial banks over buildup to 2019 general elections and low yields on government securities.

In a swift response, a stockbroker, Tajudeen Olayinka said, “You must understand that the need for loan loss provisions by banks in Nigeria is statutory, and banks cannot deliberately reduce it in their books to pave way for overstating their profit figures.

“Non-compliance to prudential guidelines by banks will make it inevitable for auditors to qualify accounts of any erring bank.”

He expressed further that “The thing that can explain reduction in loan loss provisions in 2018 as compared to 2017 figure is the observed reduction in loans to private sector and state & local governments by as much as 4.24per cent in 2018.

“If you go further to consider banks’ holding of liquid assets, you will notice that the industry statistics went up to 65.0per cent in Q4 of 2018, from 54.8per cent in Q4 of 2017.

“The prescribed minimum was 30per cent in both years. This is an indication that deposit money banks were wary of putting more money in risky assets in 2018 because of fear of defaults and the state of the economy.”

Analysts at Cordros Capital Limited had said the decline in impairment charges had been a theme for all tier-1 commercial banks in 2018.

The Lagos-based firm noted that despite the implementation of IFRS 9, banks have continued to cautiously lend to real sector of the economy.

They expressed that, “This is as a result of the banks’ cautious approach to loan creation, after the significant deterioration in asset quality experienced during the crux of the economic recession in 2016-2017 when oil prices took a nosedive.

“In fact, what we have seen is a contraction in loan books, as obligors have improved in their loan pay-downs, following the improved economic conditions and rising oil prices.”

The analysts explained that it was also worth stating that the treatment of IFRS 9 initial adjustment via equity has cushioned its impact on the income statement.

“Overall, these have contributed significantly to the sharp drop in impairment charges, particularly for the tier 1 banks,” they declared.

IFRS 9 addresses the accounting for financial instruments and it contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting. It will replace the earlier IFRS for financial instruments, IAS 39, when it becomes effective next year.

The National Bureau of Statistics (NBS)  in May stated that commercial banks Non-Performing Loans (NPLs) had dropped to N1.67 trillion in first quarter (Q1) of 2019 from N1.76 trillion reported in fourth quarter (Q4) of 2018.

According to the report, Gross loans commercial banks granted in Q1 2019 was N15.48 trillion as against N15.35 trillion in Q4 2019, bringing NPL/Total Loans to 10.83 per cent from 11.67 per cent in Q4 2018.

Commercial banks’ year on year sectoral charge in NPLs by sector as at April 2019, according to NBS showed that five sectors accounted for 77.5 per cent or N1.3 trillion of the N1.67 trillion total NPLs.

The breakdown revealed that Oil & Gas sector reported N777.84 billion NPLs as at April 2019 from N871.17 billion report in April 2018 while general commerce reported N166.86 billion NPLs as at April 2019, N12.57 billion or 7.01 per cent below N179.43 billion reported in prior year’s April.

Others include, “General” N151.12 billion NPLs as at April 2019; Manufacturing sector, N113.82 billion and Power & Energy, N100.47 billion NPLs as at April 2019.

The report by NBS noted that commercial banks’ NPLs in Q1 2018 was N2.19 trillion but later dropped to N1.94 trillion in Q2 2018 and increased to N2.25 trillion in Q3 2018.

The Central Bank of Nigeria (CBN) had disclosed that  NPLs, somewhat improved from 11.68per cent in December 2018 to 11.28per cent in February 2019.

The apex bank noted that “the downward trend is a good indicator of the effectiveness of the recovery efforts of the banks and the regulatory support of the CBN towards achieving lower NPLs, even though the ratio remains above the prudential requirement of five per cent.

“Besides the improvement in the NPLs ratio, there is also improvement in the provisions made for NPLs which stood at 98.59 per cent coverage at end-February, 2019 compared to 78.27 per cent at end-February, 2018.”

The apex bank commended the Federal Government for the settlement of debt owed to oil marketers, which has considerably helped in reducing the NPLs portfolio of the banking sector.

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