Nigeria: Commercial Banks Write Off U.S.$4 Billion in Bad Debts in 4 Years

(file photo).
28 July 2020

A minimum of N1.9 trillion impaired loans has been written off by commercial and merchant banks operating in Nigeria from their loan portfolio in the last four years, a report by Agusto & Co, a foremost rating institution in Nigeria, has disclosed.

The report also shows that the banks restructured N7.8 trillion loans within the period following the directive by the Central Bank of Nigeria (CBN) in March that permitted banks to restructure loans to businesses that have been severely impacted by the Coronavirus (COVID-19) pandemic.

The firm stated in its "2020 Banking Industry Report", that the volume of write-offs have been driven by the weak macroeconomic climate and the introduction of the International Financial Reporting Standard (IFRS) 9 accounting standard in 2019.

According to the report, the industry's asset quality is further threatened given the significant exposures to vulnerable sectors, but, it however, affirmed that the level of asset quality deterioration would be moderated by the CBN's permitted loan restructuring to certain sectors of the economy.

It stated: "While the forbearance to restructure some loans is expected to keep the industry's impaired loan ratio, which stood at 7.6 percent as at 31 December 2019, at bay in the short term, Agusto & Co. is concerned about the performance of these affected loans, given that the coronavirus pandemic is yet to be curtailed and a second wave may be looming. A further slowdown in economic activities and a total lockdown may worsen an already bad situation.

"While we acknowledge a likely extension of the forbearance period in the event that the pandemic lingers, we expect a rise in the impaired loan ratio of the banking industry in the medium term.

"Our expectations are also driven by the regulatory-induced growth in the loan book driven by the minimum loan-to-deposit ratio (LDR) policy, with sanctions on banks for non-compliance through additional Cash Reserve Ratio (CRR) debits.

"We believe that banks should not be forced to lend as this may encourage weaker risk management practices. Furthermore, the foreign currency component of these restructured loans, largely in the oil and gas and power sectors bloat the exposures in the likely event of a further devaluation of the domestic currency."

Agusto & Co further stated that approximately 23 percent of the industry's gross loans and advances was classified in the stage two category as at 31 December 2019, saying that it threatens the industry's capital base and profitability.

"Agusto & Co. believes that the volume of stage two loans is a threat to the industry's asset quality and future profitability. Stage two loans, primarily, comprise exposures with an increase in the associated credit risk compared to when the loan was disbursed. The COVID-19 pandemic with its impact on businesses has elicited an increase in the volume of stage two loans.

"The COVID-19 pandemic is a further threat to capital. While most operators have a core capital base that very well exceeds the regulatory minimum, the banking industry will need to recapitalise in the medium term in view of proposed new minimum capital requirements, though yet to be disclosed by the apex bank," it said.

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