Banks’ Impairment Charges Soar by 56.3% to N1.03tn on Weakening Economic Variables

Kayode Tokede

In an apparent move to reduce the negative impact of macro economic challenges on their risks assets, 11 banks significantly increased their impairment charges to N1.03 trillion in half year ended June 30, 2024.

The provisioning showed a jump of 56.3 per cent compared with N657.7 billion recorded in half year ended June 30, 2023.

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, macro economic challenges in Nigeria and Sub-Sahara Africa countries where they operated have disrupted economic activities, and it is expected to affect most risk assets.

THISDAY checks showed that Access Holdings Plc, Zenith Bank Plc, FBN Holdings, Fidelity Bank Plc, Stanbic IBTC Holdings Plc, Ecobank, Wema Bank Plc and Sterling Financial Holdings Company Plc were nine banks that increased their impairment charges in H1 2024.

Further checks showed that United Bank for Africa Plc (UBA) and Guaranty Trust Holding Company Plc and FCMB Group Plc cut down on their impairment charges in the period under review. 

Although while the total provisioning by 11 banks rose by 56.3 per cent, some individual bank raised their impairment charges by over 300 per cent with Stanbic IBTC increasing its charges by 344 per cent from N5.98 billion in H1 2023 to N26.5 billion in H1 2024.

Stanbic IBTC Holdings explained that increase on its impairment charge on loans and advances was due to the impact of expected credit loss (ECL) charges on new loans booked and additional provisioning on existing NPL’s.

“Impairment on Stage 1 loans increased due to increase in new loans booked. Credit loss ratio however increased to 1.7per cent in H1 2024,” Stanbic IBTC Holdings added. 

Access Holdings recorded a jump of 230 per cent in impairment charges, from N37.18 billion in H1 2023 to N122.74 billion in H1 2024. On its part, Zenith Bank posted impairment charges of N415.29 billion, showing a jump of 99.7per cent from N207.93 billion in H1 2023.

Similarly, FBN Holdings posted impairment charges of N92.99 billion in H1 2024, indicating an increase of 64 per cent from N56.72 billion booked in H1 2023.

Also, Fidelity Bank made provisioning of N35.93 billion in H1 2024, up 80.3 per cent from N19.9 billion in H1 2023, while Ecobank’s impairment charges stood at N187.99 billion in H1 2024, indicating an increase of 272.56 per cent from N50.5 billion in H1 2023.

While Wema Bank booked impairment charges of N4.65 billion in H1 2024, up by 234 per cent from N1.4 billion in H1 2023, Sterling Financial Holdings Company increased its impairment charges by 7.3 per cent from N4.16 billion in H1 2023 to N4.47 billion in H1 2024.

However, GTCO impairment charges declined by 42.9 per cent from N82.96 billion in H1 2023 to N47.4 billion in H1 2024, while that of UBA also dropped by 59.3 per cent to N58.56 billion in H1 2024 from N143.9 billion reported in H1 2023.

In addition, FCMB group declared N31.34billion impairment charges in H1 2024, about 33 per cent decline from N47.08 billion announced in H1 2023.

GTCO in a statement to investors and analysts stated that, “The Group booked sizeable loan impairment charges of N47.40billion in H1 2024, though lower than the sum of N82.96 billion that was charged in H1-2023, due to the level of risk buffers created in prior year and continued improvement in the loan book quality.

“Notwithstanding weakening macro economic variables, the key driver of the predictive ECL model weighed negatively on the ECL allowance charged during the period causing management overlay on stage 2 facilities as permitted under IFRS 9 in line with its conservative posture of building up credit risk reserves to deal with adverse situations.”

“The Group also recognised N357.55mn in H1-2024 as an additional impairment charge on other financial assets (FA) as a mitigant against residual loss rate on its investment in Ghanaian sovereign securities and other foreign currency financial instruments whose underlying values are sensitive to adverse exchange rate movement,” the most profitable bank added in a statement.

Analysts said growing impairment charges did not come as a surprise given the headwinds in the economy, amid rising inflation rate, unstable foreign exchange and hike in interest rate.

According to the Chief Executive Officer (CEO), Highcap Securities Limited, Mr David Adnori, the rising cost of risk of banks, which is simply referred to as higher impairment charge observed in some banks’ H1 2024 is a reflection of weakening fundamentals of the economy.

“Notably, the industry’s NPL steadily dropped to 3.8 per cent in Jun 2024 from 4.8 per cent in April 2024 but some banks have reported higher NPL. In fact, the NPL growth in some  banks 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 inflation rate and unstable foreign exchange resulted into higher portfolio impairment charge on stage 1 loans, despite being performing assets,” he stated.

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 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 2024FY, as the full impact of the macro weakness, takes toll on banks’ asset quality,” he said.

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 2025.

“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,” he added.