Nigerian Banks’ Stellar 2019 Loan Performance Eclipsed by Threat of Devaluation

Recently released banking sector statistics showed greater efficiency in  Nigeria’s financial intermediation, particularly with respect to improved loan administration and increased mileage on the road to achieving a cashless economy in 2019. One of such data, from the National Bureau of Statistics, revealed that banking sector non-performing loans (NPLs) declined year-on-year by 40.75% to N1.79 trillion in December 2019.

This was in spite of a 13.75% increase in loans and advances to N17.19 trillion occasioned by a directive from the Central Bank of Nigeria to deposit money banks to increase their loans. to deposit ratio to 65% by the end of 2019. Hence, the NPL ratio declined to 6.17% (regulatory limit is 5%) at the end of 2019 compared to 11.82% as at the end of 2018 – suggesting a general improvement in loan administration to most economic sectors (ten out of fourteen major sectors). Banks, in some cases, recorded lower NPL ratios in some economic sectors despite increasing their level of credit exposure to businesses in those sectors.

Remarkably, the Oil & Gas sector which gulped the bulk of bank loans at 26.64% (following an 18.68% y-o-y increase in risk assets to the sector) recorded a plunge in NPL ratio to 4.79% at the end of 2019 (from 22.77% at the end of 2018). Similarly, the manufacturing sector which accounted for 15.26% of total loans (following a 17.59% y-o-y increase in risk assets) witnessed a moderation in NPL ratio to 3.93% at the end of 2019 (from 5.83% at the end of 2018).

In a few other cases where the level of NPL ratio increased with increased risk asset creation, the Agricultural sector which accounted for 4.49% of total loans (following a 26.59% boost in risk assets) saw an increase in NPL ratio to 6.67% at the end of 2019 (from 5.95% at the end of 2018). Also, the Construction sector which accounted for 4.21% of total loans (following a 17.68% increase in risk assets) recorded an increase in NPL ratio to 11.95% at the end of (from 8.44% at the end of 2018).

With regard to developments in the cashless economy, the banking sector recorded a 24% increase in the number of transactions made via all of its payment channels (physical and electronic), from N138.82 trillion in 2018 to N171.49 trillion in 2019. Electronic payments were by far the preferred mode of payments (97.31% of all payment channels) even as transactions made via NIP (Nigerian Inter-Bank Settlement System Instant Payment) accounted for 61.36% or N105.22 trillion (greater than 46.89% or N80.42 trillion in 2018) of total payments.

NAPS (Nigerian Inter-Bank Settlement System Automated Payment System) accounted for 14.65% or N25.13 trillion (higher than 13.148% or N23.11 trillion) while Payments made via mobile devices sky-rocketed by 157% to N5.08 trillion – although this mode of payment accounted for only 2.96% of total payments. However, Cheque transactions which accounted for 2.61% or N4.48 trillion were the only payment channel to have recorded a decline, by 11%.

The lower incidence of NPLs suggests that Nigerian banks have developed greater loan administration capacity over time and are, in the short term, better positioned to weather the anticipated economic recession on account of threats of COVID-19 and crash in global crude oil prices. The risk of a rise in bad loans may be also mitigated by the ability of borrowers to refinance previously expensive loans with now cheaper credit in a low-interest rate regime. However, only banks with surplus dollar asset positions may be better equipped to withstand another likely devaluation of the exchange rate which could hamper dollar-based loan repayments. We, therefore, warn that a protracted weakness in global crude oil prices could set the Nigerian financial system back to the 2016/2017 crisis period when NPL ratio peaked at 15.13% – more than thrice the regulatory NPL limit of five percent.

Cowry Asset Management