Banks’ Impairment Charges Soar by 113% to N228bn

•W’Bank insists on subsidies’ removal, unified exchange rate

Goddy Egene in Lagos and Emmanuel Addeh in Abuja

In an apparent move to reduce the negative impact of COVID-19 on their risks assets, nine banks have significantly increased their impairment charges to N288.182 billion in 2020. The provisioning showed a jump of 113 per cent compared with N135 billion recorded in 2019.

An impairment charge usually reflects a fall in value or worse-than-expected performance of the asset.
While banks increased their lending partly due to the Central Bank of Nigeria (CBN)’s policy on loan-to-deposit ratio (LDR), which is put at 65 per cent, the COVID-19 pandemic, which disrupted economic activities, is expected to affect most risk assets.

THISDAY checks showed that the nine banks that increased their impairment charges are: Access Bank Plc; Ecobank Transnational Incorporated Plc; FCMB Group Plc; Fidelity Bank Plc; Guaranty Trust Bank Plc; Sterling Bank Plc; Stanbic IBTC Holdings Plc; United Bank for Africa Plc and Zenith Bank Plc.
Besides, the World Bank has sustained pressure on the federal government on the need to remove all forms of subsidy on petrol and electricity supply and to harmonise the forex rate.

Although while the total provisioning by banks rose by 82 per cent, some individual bank raised their impairment charges by over 200 per cent with Stanbic IBTC increasing its charges by 509 per cent from N1.632 billion to N9.935 billion.

GTBank Plc recorded a jump of 299 per cent in impairment charges, from N4.911 billion in 2019 to N19.572 billion in 2020. Access Bank Plc posted impairment charges of N62.893 billion, showing a jump of 212 per cent from N20.189 billion in 2019. Ecobank posted impairment charges of N86.734 billion, indicating an increase of 79 per cent from N48.316 billion booked in 2019. Zenith Bank Plc made provisioning of N39.534 billion in 2020, up 64 per cent from N24.032 billion in 2019. FCMB Group’s impairment charges stood at N22.307 billion in 2020, indicating an increase of 62 per cent from N13.747 billion in 2019. Fidelity Bank Plc, which had a write-back of N5.292 billion in 2019, made a provision of N16.858 billion in 2020.
United Bank for Africa Plc booked impairment charges of N22.443 billion last year, up by 35 per cent from N16.336 billion. Similarly, Sterling Bank Plc increased its impairment charges by 35 per cent from N5.838 billion in 2019 to N7.906 billion in 2020.

However, FBN Holdings Plc’s impairment charges declined from N51.093 billion to N50.596 billion.
Investment and financial analysts said the higher impairment charges did not come as a surprise given the headwinds in the economy last year.

According to the Chief Executive Officer (CEO) of Blackstone Capital, an investment management firm, Dr. Lizzie Kings-Wali, the rising cost of risk of banks, which is simply referred to as higher impairment charge observed in banks’ audited 2020 financial statements is a reflection of the rising Non-Performing Loan (NPL) ratio and weakening fundamentals of the economy.

“Notably, the industry’s NPL steadily rose in the second half of the year, printing at 6.01 per cent by December 2020, some 101 basis points above the prudential tolerance of 5.0 per cent, hence necessitating a higher impairment charge. In fact, the NPL growth is higher in nominal terms, except that the double-digit growth in loan book partly masked the effective rise in the NPL ratio. More so, the relatively weak fundamentals of the economy exacerbated by the COVID-19 pandemic and civil unrest resulted into higher portfolio impairment charge on stage 1 loans, despite being performing assets,” she stated.

Kings-Wali added that the percentage of stage two loans, which though performing but had shown stress and likelihood of delinquency over the near term had increased across the industry, therefore deserving the conservative stance of banks and their auditors to proactively take a higher anticipatory impairment charge on such loans.

“Hence, the rising cost of risk is a reflection of the lagged impact of the realities of the economy and banks’ inherent credit risk. Whilst the CBN and banks are apparently seeking measures to stem this potential erosion to banks’ profitability going forward, I expect more credit losses in 2021, as the full impact of the macro weakness, takes toll on banks’ asset quality,” she said.
However, she said the situation would not degenerate into a crisis as NPL ratio should possibly peak in the year and begin to moderate in 2022.

“More importantly, the impact on banks would be uneven. For instance, banks that have lent foreign currency to domestic entities like those in the power sector, which generate naira revenues maybe hard hit, as the impact of naira devaluation and relative FX supply shortages balloon their debt service and potentially impair borrowers’ ability to effectively meet obligations as at when due. Likewise, recent delay in international and local ports, occasioned by COVID-19 and other structural factors have increased the cash conversion cycle of importers, thus potentially weakening the credit strength of importers, especially as most players maybe unable to fully pass the impact of longer import cycle, reduced margins and naira volatilities on the final consumers of the imported products, given the already stressed-consumer wallet and pressured purchasing power of the average Nigerian,” she stated.

Also, the Executive Vice-Chairman of Funds Matrix & Assets Management Limited, Yadinma Onwu, attributed the higher impairment charge of banks to the lagged impact of the weaker economy and attendant impact on borrowers’ ability to meet obligations.

“I believe the market is already pricing this expectation in the valuation of banks’ stocks, as we look forward to a higher credit losses in 2021, a phenomenon that may aggravate the volatility risk of their treasury portfolios in the year, given the dynamics of the interest rate environment over the cycle. Nonetheless, we are not at a systemic risk situation and I believe the rise in NPL ratio and impairment charge should be moderate, even so, it may constrain the return on equity and dividend growth prospect of banks,” he said.

Onwu explained that with the conservative dividend payout ratios of Nigerian banks, which hovers between 30 per cent and 50 per cent, the impact of the higher cost of risk on dividend should be muted, even so, it may undercut profit growth.

“To this end, we still see value in the leading Nigerian banks and selective mid-sized players, albeit timing, is important, and this is why we at Funds Matrix & Asset Management continue to provide relevant advisory services to our clients in addition to our commitment to best execution,” he said.

W’bank Insists on Subsidies’ Removal, Unified Exchange Rate.

The World Bank has intensified pressure on the federal government on the need to remove all forms of subsidy on petrol and electricity supply as well as to harmonise forex rate.
The bank, in a statement at the weekend, unifying the exchange rate would reduce inflation and attract the much-needed foreign investments the country badly needed.

The statement, which revealed snippets of the discussion the World Bank officials had with the Minister of Finance, Budget, and National Planning, Mrs.. Zainab Ahmed, and the CBN Governor, Mr Godwin Emefiele, said Nigeria must be resolute in its drive to end subsidies.

However, the World Bank President, David Malpass, told both top government functionaries during the meeting that buffers or compensation should be provided for the poor and vulnerable to ameliorate the impact on the removal of government subsidies.

“The World Bank Group’s David Malpass met with Dr. Zainab Ahmed, Nigerian Minister of Finance, Budget, and National Planning, and Mr. Godwin Emefiele, Governor of the Central Bank of Nigeria.
“President Malpass encouraged work toward an exchange rate unification, highlighting the importance of moving decisively to benefit growth and wages.

“President Malpass emphasised that a liberalised exchange rate will significantly benefit the poor, reduce inflation, and attract private investment to support Nigeria’s recovery from COVID-19,” the statement posted on the bank’s website stated.

It added that Malpass told the minister of the World Bank Group’s eagerness to support critical development issues in Nigeria as the country works towards a green, resilient and inclusive recovery.
“The president and minister also discussed further reforms to phase out energy subsidies, noting the importance of compensatory measures for the poor and vulnerable,” it added.

The World Bank leadership stated that it discussed the need for the Nigerian government to ramp up the deployment of COVID-19 vaccines throughout the country, saying that the organisation will assist the country, whenever asked to do so.

It added: “President Malpass and Minister Ahmed discussed Nigeria’s ongoing COVID-19 response and the need for fast deployment of vaccines. President Malpass confirmed the World Bank Group’s readiness to support the vaccine distribution process, as well as for procurement of additional vaccine doses.”