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Loan Provisioning: CBN Directive Threatens Banks’ Profitability

Fears are being expressed over the recent Central Bank of Nigeria (CBN) directive to banks to increase their loan provisioning

The recent directive by the Central Bank of Nigeria, CBN, for deposit money banks (DMBs) to increase their loan provisioning poses a threat to the lenders’ profitability as they approach another accounting year end.

Last week the apex bank told commercial lenders to double provision for performing loans to 2 per cent to build adequate buffers against unexpected losses With growing non-performing loans of 4.65 per cent some banks have been shoring up their balance sheets in preparation for adopting stricter international requirement that analysts say could erode capital adequate ratio between a hundred and 4 hundred basis points.

The CBN gave the directive to enable the banks, many of which have been managing to survive on life-support measures, to cope with the harsh economic environment and regulatory headwinds that pose great challenge to their activities.

The DMBs, in compliance with the apex bank’s earlier directive, had published a list of their bad debtors, a drastic measure agreed upon with the Bankers Committee to recover huge debts owed by bank customers, categorized as toxic assets. The publication revealed that majority of the non-performing loans are in the energy sector – power, oil and gas.

The UNION had reported that the DMBs were walking a tight rope in their bid to extend the required support to the wobbly power sector, still grappling for breath, since the sector was transferred to private investors about a year ago.

Late last year, it was reported that Nigerian banks were responsible for raising over 70 per cent (about N280 billion) of the balance paid by investors for the 14 successor companies to the PHCN. Approximately $2.5 billion was raised by the BPE in 2013 from the privatisation of PHCN’s assets (the GENCOs and DISCOs). Another $5.7 billion is expected to be raised by the Federal Government from this year’s sale of the National Integrated Power Plants (NIPP).

The DMBs were highly expectant that the power sector was another green field to harvest huge revenue because of the ‘endless’ opportunity that it harboured. The development, it was learnt, had led to a boom in the demand for generation, distribution and transmission facilities such as aluminum conductors, meters, transformers, cables, transmission towers and other accessories, a scenario that added fillip to the move by DMBs to ‘corner’ the sector.

Investigation, however, revealed that DMBs are already facing tough times as loans they granted to power firms which acquired the unbundled assets of the erstwhile PHCN, have become a major threat to the banks’ financial results. It was revealed that most of the loans are not being serrviced as scheduled, a development that showed that the facilities had become potential Non-Performing Loans (NPLs) that would eventually create balance sheet difficulty for the banks.

The affected banks are also said to have started making the statutory provisions for the potential NPLs as required by the prudential guidelines issued by the Central Bank of Nigeria (CBN). A top-management banker in a new generation bank told this newspaper last week that the mounting NPLs arising from the huge facilities ambitiously extended to the power sector had become a source of concern to the DMB chief executives.

He explained: “We looked at their books, studied their proposals and relied on Government assurance in granting the loans to the new power sector investors. They promised to service their commitments on schedule because we all believed there was, and still remains, huge opportunities in the power sector.

“We are entering another tunnel of management of NPLs which created serious operational challenge for banks during the CBN 2009 bank reforms. What worsened the already bad situation is that the Asset Management Company of Nigeria (AMCON), the bad debt buyer, has said it would not get involved in buying bad debts of any bank anymore.

The UNION further learn that some of the DMBs had taken the bold step to transfer the bad and doubtful facilities to their NPL books after their discussions with the loan beneficiary firms showed that the chances of servicing the loans are slim; while the prospect of their being repaid appears even slimmer.

It was gathered that the trending move by some DMBs to seek the Eurobond option and the recent Rights Issues outing at the Nigerian Stock Exchange by the DMBs were prompted by the dwindling prospects of DMBs in recovering the huge facilities extended to the power sector operators.

“Some banks have begun to refinance the power sector loans in order to avoid a situation where the repayment default would affect their results severely. This explains the options of capital raising being adopted by DMBs such as offshore funding via Eurobonds, tier-2 capital, among others, aimed to refinance the poorly performing loans,” the source revealed.

The UNION gathered that the power sector operators blame their woes on the difficulty experienced in securing gas to power their generating systems. Some of them were also said to have inherited huge liability arising from accumulated debt on gas supply, thus creating a backlog that now threatens their operations severely. Others claimed that the rot they encountered when they took-over the facilities was deeper than expected, coupled with last-minute cannibalisation of the facilities through the unkind and criminal act of asset stripping by unscrupulous employees of the former asset owners.

While the non-performing power sector continues to pose a threat to the people’s standard of living, the non-performing loans create even more serious problem for the DMBs whose profits are likely to be seriously affected by the negative trend. The impact will definitely affect not only the banks’ revenue profile, but their ability to engage more employees and pay good wage commensurate with the demanding jobs being undertaken by the workers.

The DMBs with interests in the power sector include Access Bank, Diamond Bank, Union Bank, Sterling Bank, GT Bank, Fidelity Bank, First Bank, Zenith Bank, Skye Bank and Fidelity Bank. An industry report gave detail of the magnitude of financial investments by the banks in the power sector as follows:

“Zenith Bank Plc sold its $500m dollar-denominated bond. The bank had explained that the proceeds would enable it to finance the power sector. Similarly, Diamond Bank Plc issued its debut $200m five-year Eurobond. The bank also plans to tap into the equities market to raise about $300m.

“Diamond Bank is seeking to raise $500m additional capital also for the growth of the Nigerian power sector; while Union Bank Plc is seeking approval to raise $750m, Access Bank Plc at its recently held Annual General Meeting got approval of its shareholders to raise $1bn.

“Sterling Bank recently disclosed plans to issue a $200m Eurobond early next year, while Skye Bank, which raised N50bn last year, is also eyeing the Eurobond market.”

Other banks that have tapped into the Eurobond market to raise funds for the power sector are Fidelity Bank, Guaranty Trust Bank and First Bank.

It could be recalled that CBN announced that it had given 3 deposit money banks up till June next year to recapitalize after failing to hit the minimum capital adequacy ratio of 10 per cent. The regulator’s minimum rate is 15 per cent. The apex bank which did not name the affected banks said they are in the league of Nigeria’s 14 big commercial banks that enjoy the operating licence of national and regional banking with minimum capital base of N25billion and N10 billion respectively.

–  Sam Diala

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