Banks’ Impairment Charges Drop as Loan Repayment Improves

By Goddy Egene

Provision for loan losses by commercial banks in the country has dropped, reflecting an improvement in loan repayment.

This was revealed by the nine-month results of some of the banks quoted on the Nigerian Stock Exchange (NSE) released recently, and was compiled by THISDAY.

Findings showed that the 10 banks recorded lower impairment charges for the nine months ended September 30, 2018.    

The banks are: Access Bank Plc, Guaranty Trust Bank Plc, Sterling Bank Plc, United Bank for Africa (UBA) Plc, Zenith Bank Plc, FBN Holdings Plc, Diamond Bank Plc, Ecobank Transnational Incorporated, Fidelity Bank Plc and Stanbic IBTC Holdings.

Specifically, the 10 banks’ total impairment charges fell by 35 per cent from N328.172 billion in 2017 to N213.93 billion in 2018.

Contrary to concerns that the implementation of the International Financial Reporting Standard (IFRS) 9 promulgated by the International Accounting Standards Board (IASB), would increase impairment charges of banks, lower provisions have been made by financial institutions.

For instance, Access Bank Plc recorded impairment charges of N8.353 billion in 2018, down from N12.824 billion in 2017, while GTBank’s provision declined by 79 per cent from N8.357 billion in 2017 to N1.74 billion in 2018.  UBA ended the nine months with impairment charges of N10.67 billion compared with N12.91 billion in 2017. Sterling Bank’s impairment charges reduced from N7.63 billion to N3.615 billion, just as Zenith Bank Plc’s provision fell by 70 per cent from N47.053 billion to N14.34 billion. Also, Stanbic IBTC Holding Plc’s loan loss provision decreased by 77 per cent from N20.334 billion to N4.136 billion.

Financial analysts told THISDAY that the decline in impairment charges was due to borrowers improving in their loans  repayment. They added that banks have also adopted cautions approach to loan creation.

Analysts at Cordrol Capital Limited said the decline in impairment charges has been a theme for all tier 1 banks this year.

They said, “As seen in the recent nine months results,  impairment charges for Zenith Bank (-70 ), GTBank (-79 per cent y/y), and UBA (-17 per cent y/y) have declined, despite implementation of the stringent IFRS 9 requirement. 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 in 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 in 2018.

Speaking on the IFRS 9, Director, Banking Supervision Department of the Nigeria Deposit Insurance Corporation, Mr. Adedapo Adeleke, had said, “This is expected to put more pressure on banks’ capital as the lenders will need to use part of their profits to make provision for loans that are expected to become non-performing, after making provisions for those that are already non-performing.”

Managing Director of Ecobank Nigeria, Mr. Patrick Akinwuntan, recently pointed out that Nigeria remains a very attractive market, adding that investors in search of favourable yields would always look to the country.

“And given a population of 180 million people, and the vast natural resources we have, for sure, people would still look at Nigeria. The fundamentals remain very important and the productive sector needs to continue to receive full attention,” he added.