Banks financial results give investors’ concern


…as CBN consider Skye Bank for more lidiuidity


STABILISING the system and returning the confidence to the markets and investors may not be as easy as it was in 2009 as falling oil price since mid-2015 has dealt a serious blow on government revenues and depleted external reserves.

This leaves questions as to whether Nigeria has the money to salvage banks, since a dearth of oil revenue has left states impotent and unable to pay salaries.

There are also fears of non-performing loans (NPLs) exceeding the five percent industry threshold, a development which analysts say could trigger imminent mergers and acquisition, (M&A).

Some analysts believe that the volatility in the foreign exchange market, huge write-offs and NPL which emanated from exposure of banks to the oil and gas and power sectors have also led to their present precarious state.

With the economic downturn that has made it practically difficult for customers across sectors to meet obligations owed to banks, there are fears that the banking sector may witness another poor outing as investors, stakeholders awaits their half year financial results.

Investors fear, National Daily gathered is based on the deteriorating capital adequacy ratio (CAR) occasioned by the heavy exposures to high FX percentage loan book and relatively low FX long positions in a devaluation environment.

“The fears of poor outing by banks in their half year results seem palpable, considering their poor performances in the first quarter and most importantly, recent developments like naira devaluation and revelations that some of the banks have recorded more losses and non-performing loans and lower capital adequacy ratio,” says Friday Ameh, an energy analyst.

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But the Asset Management Corporation of Nigeria (AMCON) which is currently battling with its own huge loans in its portfolio has foreclosed further acquisition of NPLs.

“AMCON is working hard to resolve the huge loans in our portfolio. We are not aiming at acquiring new NPLs from the banks. But with the recent action of the apex bank on some banks, I am sure they are putting measures in place to mitigate against the rising NPLs in Nigerian banks,” says a source in AMCON.

Further investigations reveal that the first casualty of the ongoing measures by the Central Bank of Nigeria (CBN) against low or eroded CAR, is being assessed by CBN on the impact of the announcement of the take-over of the management and board of the bank on its liquidity for further injection.

The CBN will this week commence the assessment of further ‘holes’ created as a result of haemorrhage caused by the take-over announcement of the board and management of the bank for further capital injection,” a source told National Daily recently.

“Logically, we expect the CBN to provide some form of liquidity support or guarantee, to keep the bank’s operations running smoothly, pending when the capital, liquidity and asset quality challenges are brought to a reasonable resolution (particularly the first two),” say analysts at Renaissance Capital.

“For banks that have sizeable FX NPLs, depreciation could hurt their NPL ratios. Had they been holding the requisite provisions on these NPLs in naira, that would put significant pressure on their provisions and coverage ratios, as they need to set aside more naira to maintain coverage ratios at the pre-depreciation level,” Renaissance Capital analysts, Adesoji Solanke and Olamipo Ogunsanya, said in a June 27 note.

While expressing concerns about CAR of some other banks which they expect their capital ratios to come under pressure, partly due to some monetary policy measures, they express fears, saying “with guidance of at least 5% in FY16E”.

In other words, we think the risk of a capital breach are high, but as mentioned in “Life after 40”, we do not think the CBN does anything drastic in instances of such relatively small capital breaches, given its acknowledgment of the difficult market and macro conditions. Furthermore, 45-50% of the bank’s FY15 NPLs were in FX and provisions mostly held in naira, which is clearly negative for coverage ratios, in our view.”

They further advise the CBN and the management of Skye Bank to manage the current situation properly, adding, “The risk is that should the publicity on this not be properly managed, we could see some flight to safety from tier 2/3 banks to the tier 1 banks.”

The fear of some of the analysts is based on the fact that in 2006, the CBN released a contingency framework, highlighting how it would deal with a bank facing capital constraints. At that time, the minimum CAR requirement was 8% and the framework essentially said that should a bank’s CAR fall below 2%, the CBN would take over management and control, and/or revoke the license.