On the Back of Macro economic Challenges, Six Banks’ Impairment Charges Soar by 55.4%

Kayode Tokede

In a desperate move to tackle the negative impact of the macro economic challenges on risks assets, a total of six banks have significantly increased their impairment charges to N116.9billion in first half (H1) 2022 as against as against N75.24billion impairment charges in first half (H1) 2021. This represents an increase of 55.4per cent

An impairment charge usually reflects a fall in value or worse-than-expected performance of the asset.

Banks increased their lending partly due to the Central Bank of Nigeria (CBN) policy on loan-to-deposit ratio (LDR), which is put at 65 per cent, the hike in inflation rate and post-COVID-19 pandemic challenges.

These, among others, have disrupted economic activities, and it is expected to affect most risk assets.

According to THISDAY findings, the six banks that increased their impairment charges are: Access Holdings Plc, United Bank for Africa Plc, Zenith Bank Plc, Stanbic IBTC Holdings Plc, FCMB Group Plc and   Ecobank Transnational Incorporated Plc.

Access Holdings recorded a jump of 29 per cent in impairment charges, from N28.7 billion in H1 2021 to N36.86 billion in H1 2022.

UBA posted impairment charges of N11.8billion in H1 2022, showing a jump of 258.7per cent from N3.28billion in H1 2021.

Ecobank posted impairment charges of N27.02billion in H1 2022, indicating an increase of 30.10per cent from N20.77billion in H1 2021, while Zenith Bank made provisioning of N25.12billion in H1 2022, up 27 per cent from N19.8billion in H1 2021.

In addition, FCMB Group’s impairment charges stood at N10.7 billion in H1 2022, indicating an increase of 166.9 per cent from N4.01billion in H1 2021, while Stanbic IBTC Holdings, that had a write-back of N1.28 billion in H1 2021, made a provision of N5.47billion in H1 2022.,

Analysts stated that domestic and foreign macroeconomy challenges forced banks to make huge provisions for Non-Performing Loans (NPL).

Although NPL in the banking sector according to Central Bank of Nigeria (CBN) dropped to 4.95 per cent at the end of June 2022 compared with 5.70 per cent at the end of June 2021.

Commenting, the vice president, Highcap Securities Limited, Mr. David Adnori stated that the rising cost of risk of banks, which is simply referred to as higher impairment charge observed in banks’ H1 2022 financial statements is a reflection of the weakening fundamentals of the economy.

According to him, “Although we have seen NPL dropping, the relatively weak fundamentals of the economy exacerbated by the COVID-19 pandemic and global unrest due to war between Russia / Ukraine resulted into higher portfolio impairment charge on stage 1 loans, despite being performing assets.”

He 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 global economy and banks’ inherent credit risk. While the apex bank and banks are apparently seeking measures to stem this potential erosion to banks’ profitability going forward, I expect more credit losses in 2022 FY, as the full impact of the macro weakness, takes toll on banks’ asset quality,” he added.

However, he said the situation would not degenerate into a crisis as NPL ratio should possibly peak in the year and begin to moderate in 2022.

Analyst at PAC Holdings, Mr. Wole Adeyeye, attributed the growth to increase in loan books, trigged by 65 per cent LDR policy of the CBN.

He explained further that, “The more banks report growth in loan books, the more they make provisions for loans in case it goes bad.”

On the increase in provision on bad loans and inflation rate impacting on banks profit in 2022 financial year, he explained that the increase in interest rate from 11.5 per cent to 13 per cent by Monetary Policy Committee (MPC) of CBN expected to enhance interest income on loans and advances to customers.

“Some Tier-1 banks are prudential in managing cost of funds because of hike in interest rate and at the same time, the increase in interest rate is expected to have positive impact on loans & advances and drive total interest income.”

Capital market analyst, Mr. Rotimi Fakeyejo attributed the higher impairment charge of banks to the lagged impact of the weaker economy and attendant impact on borrowers’ ability to meet obligations.

According to him, “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 2022, 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.”