A number of banks in Nigeria are living on borrowed time as they struggle to recover sticky assets and pare down their loan loss provisions, according to Business Hallmark.
The report said that the banks are buried in a heap of poor quality loan assets in the guise of high none performing loans (NPL’s) and that all may not be as well with the banks as the domestic regulator, Central Bank of Nigeria (CBN), would have many believe.
Indeed, recently the international credit rating agency, Fitch, marked a down grade in the credit ratings of virtually all Nigerian banks as the agency pointed to the worsening condition of their credits.
Within the year Fitch’s analysts downgraded the outlook for four Nigerian banks from stable to negative; the banks were Zenith Bank, GT Bank, First Bank and Diamond Bank.
The problems with the banks downgraded were attributed to, ‘heightened vulnerability of capital due to downside asset quality risks’ which in simpler terms meant that these banks were finding it increasingly difficult to get back the monies that they lent to customers.
Third quarter 2017 results for nearly all the banks have been dyed in rose colour. Nine months’ results for the banks have shown profit figures glide up as the economy edges out of recession. But how real are the numbers?
Truth be told with discussions with a fair number of bankers who did not want their names put in print, the profit tally for most of the banks, ‘where beautiful Picasso replicas, as brilliant as they were; they were all fake’ said a senior manager of one of the banks with headquarters in Victoria Island, Lagos.
The banker insisted that, ‘you cannot make omelets without breaking eggs, with interest rates at double digits and manufacturers rolling in escalating debt as retailers groan in agony, how the heck does a bank make money with customers hung over a barrel?’, he asked pensively.
When it was pointed out that banks had stopped granting credit and had actually become more comfortable simply buying treasury instruments at double digit yields he agreed but noted that, ‘banks may have been able to turn a trick or two by buying treasuries over the last two years, but that is not core retail banking; it is more of an investment banking function and it still does not address the problem of proper loan loss charges against risk assets that have already been created.’
In other words most banks have made inadequate provisions for loan impairments or bad credits and have simply engaged in a number of clever accounting rouses to restructure bad loans to make them appear hale and perhaps hearty.
It is obviously difficult to establish how bad Nigerian commercial bank loan portfolios precisely are, especially as even the Central Bank of Nigeria (CBN), the sector’s chief regulator, and the Nigerian Deposit Insurance Company (NDIC) often get caught on the wrong foot as bank examiners serially underestimate impairment charges required by banks to cover their deteriorating loan assets.
This has led to independent observers classifying bank loans as a mixture of financial fact, fiction and something one analyst recently called ‘faction’, a grey area between reality and outright falsehood.
Peering through reams of recently published financial data is not likely to shed very much light on the warm matter of bank assets and capital adequacy.
The problem of poor bank loan books is not just that of the smart reclassification of bank loans by managers form non-performing to performing but also the accounting convention of using historical valuation of bank assets rather than adjustment of the assets on the books by marking to market which means that if interest rates go up the value of banks assets simultaneously go down and vice versa.
It would also mean that the increasing riskiness of bank loans when interest rates rise would be better captured on bank books when loan quality is measured as weaker when rates go up; in other words as interest rates go up bank loan quality comes down.
As lending rates have hovered between 25 and 28 per cent over the last two years, bank asset quality has taken a turn for the worse.
The CBN estimates that delinquent loans as a proportion of loans outstanding on average industry wide is about 12 per cent as against the regulatory rate of 5 per cent. But even the twelve per cent claim is disputable.
Investigations suggest a more accurate rate of double that number putting real average loan impairment ratio closer to 25 per cent or a quarter of all loans outstanding. This clearly indicates that banks would have to recapitalize operations to reduce leverage (debt to equity ratio) and build greater strength in balance sheets.
In a telephone conversion with Business Hallmark, Chidi Ajaegbu, former President Institute of Chartered Accountants of Nigeria (ICAN), noted that the challenge of bank credit assets and their current levels of equity was not dire enough to cause major worry, ‘I don’t think we have an immediate systemic problem but something must be done to ensure that we do not slide into systemic distress’. He was of the opinion that banks may need to raise their capital base in 2018 by either rights issue or Initial Public Offers (IPO’s).
Also commenting on the issue, Dr. Afolabi Olowokere of Financial Derivatives Company Limited (FDC) said it is a known fact that the relatively low capital base of banks could constitute a serious problem for such institutions anywhere in the world. ‘It is normal that the capitalisation of banks will be eroded at a time like this if you consider the huge non-performing loans which they have to provide for. I hope the banks do not suffer any shocks because they have links with one another, poor management of one could set off a contagion that hurts all’’, he said.
In his own observations Dr. Adi Bongo, economist and faculty member, Lagos Business School was of the view that the recent Fitch downgrades of local bank was a fallout of the poor macroeconomic management that started last year, adding that the banking industry suffered huge capital flight as portfolio investments that were plugged into banks during the consolidation period, began to pull out on concerns over macroeconomic direction.
He further explained that, ‘Nigeria has been performing poorly in capital importation. As money began to leave the system, banks where many portfolio investors had plunked capital, started having liquidity challenges.’ Noting that, ‘…because of the state of the economy, non-performing loans in banks have increased geometrically. The combination of these two issues has caused banks to face serious challenges, except those that have strong equity bases.’
With calls for bank assets to be marked to market or at least made compliant with International Accounting Standards Board’s (IASB’s) IFRS 9 rules, the days of bankers running rings around regulators in regards to the quality of their balance sheets is slowly fading into distant memory or at least that is the hope