Banks’ Impairment Charges Drop Further as Loan Repayment Improves

The provisions for loan losses by commercial banks in the country have continued to drop, thereby raising hopes of higher returns on investments for shareholders.

Loan loss provisions had in 2016 and 2017 financial years impacted negatively on the bottom-lines of many banks due to the devaluation of the naira and difficult operating environment that made a lot of debtors to default in loan repayment, thus increasing the level of non-performing loans (NPLs) in the system.

However, the recently released results of 11 banks for the year ended December 31, 2018, reviewed showed that the level of impairment charges has reduced significantly.

Precisely, the impairment charges of the 11 bank fell by 64 per cent from N445.403 billion in 2017, to N155.153 billion in 2018.

While all the loans provision of the banks rose by 64 per cent, some banks recorded 80 per cent reduction in loan loss provision.

The 11 banks are Access Bank Plc;  Ecobank Transnational Incorporated; Fidelity Bank Plc; Guaranty Trust Bank Plc, Sterling Bank Plc, United Bank for Africa Plc; Union Bank of Nigeria Plc, Unity Bank Plc; Zenith Bank Plc, FCMB Group Plc and Stanbic IBTC Holdings Plc.

For instance, Unity Bank Plc witnessed 99 per cent reduction in loan loss provision, declining from N44.255 billion, followed by Stanbic IBTC with 89 per cent decline. The banks’ provision reduced from N25.577 billion to N2.940 billion.

Also, the United Bank for Africa Plc witnessed 86 per cent decline in impairment charges from N32.895 billion to N4.529 billion, while Zenith Bank Plc’s impairment charges fell by 81 per cent from N98.29 billion to N18.372 billion in 2018.

In the same vein, Fidelity Bank Plc saw a decline of 62 per cent in impairment charges from N11.315 billion to N4.215 billion, while GTBank  Plc recorded impairment charges of N4.906 billion in 2018, showing a decline of 62 per cent compared with N12.169 billion in 2017. Similarly, Access Bank’s loan losses provision fell by 57 per cent from N34.466 billion to N14.656 billion.

Similarly, Sterling Bank Plc ended the year with impairment charges of N5.843 billion, indicating a decline of 52 per cent compared with N12.267 billion in 2017 among others.

FCMB Group  Plc and ETI saw a decline of 38 per cent and 34 per cent from N22.667 billion to N14.113 billion and N125.893 billion to N82.044 billion respectively.

It was  further gathered that contrary to apprehensions that  the implementation of the International Financial Reporting Standard (IFRS) 9 promulgated by the International Accounting Standards Board (IASB), would increase impairment charges of banks, the financial institutions continued to see a reduction in impairment charges.

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Financial analysts said apart from strengthening risk management strategies, most of them have also maintained cautious approach to risk asset creation.

The Group Chief Officer of ETI, Ade Ayeyemi  had said: “We maintain our cautious stance on lending in this challenging period, but will continue to implement a number of exciting new customer initiatives such as our Pan-African banking app and leveraging our blue-chip partnerships to benefit our customers across 40 countries.”

Speaking on the 2018 performance, Ayeyemi noted that their cost-of-risk of 2.4 per cent was an improvement on 2017 and demonstrated the progress that we have made addressing credit quality issues and enhancing internal control processes.

“Our financial performance in 2018 was remarkable in many ways and reflected the meaningful and significant progress that we have made against the priorities that we set in our ‘Roadmap to Leadership’ strategy. We delivered a 51 per cent growth in PBT and generated a return on tangible equity of 21 per cent. Our cost-of-risk of 2.4 per cent was an improvement on 2017 and demonstrated the progress that we have made addressing credit quality issues and enhancing internal control processes,” he said.

Some financial analysts said that the decline in impairment charges was due to improvement in loans repayment. They added that banks have also adopted cautious approach to loan creation.

For instance, analysts at Cordrol Capital Limited said the decline in impairment charges has been a theme for all tier 1 banks this year.

They said: “As seen,  impairment charges for Zenith Bank, GTBank  and UBA  have declined, despite implementation of the stringent IFRS 9 requirement. This is as a result of the banks’ cautious approach to loan creation, after the significant deterioration in asset quality experienced during the crux of the economic recession in 2016-2017 when oil prices took a nosedive.

“In fact, what we have seen is a contraction in loan books, as obligors have improved in their loan pay-downs, following the improved economic conditions and rising oil prices.”

They added that  it was also worth stating that the treatment of IFRS 9 initial adjustment via equity has cushioned its impact in the income statement.

“Overall, these have contributed significantly to the sharp drop in impairment charges, particularly for the tier 1 banks,” they declared.