The current state of the Nigerian economy has illustrated the level of resilience the banking sector has shown in 2016. In spite of a negative business environment which was widely believed by financial experts to have contributed to the sharp drop in profits of the Deposit Money Banks (DMBs), they expect a better business environment in 2017.
For instance, the nation’s Gross Domestic Product (GDP) shrank by 2.24 percent year-on-year in the third quarter of 2016, following a 2.06 percent decline in the previous period and compared to market expectations of a 2.58 percent decline.
The sharp drop in oil prices has continued to hurt the oil sector which slumped for the fourth straight quarter, while the non-oil sector was flat after shrinking in the previous two periods. This resulted in adverse effects on the growth of the banking sector as the crisis in the oil sector exposed the lenders.
So far, the affected financial institutions have explained that they are focused on remediation and recovery activities towards declassifying non-performing accounts and driving asset quality improvements.
While some banks had fared better than others, the average performance of the Nigerian banking industry had not been so good as international rating organisations had down rated some banks.
This is due to the rising level of non-performing loans, NPLs in the industry. According to the CBN, average NPL level in the industry rose from five percent in December 2015 to 11 percent by June 2016. Moodys Investor Service says it expects NPLs to increase to around 12 percent
According to Afrinvest, the resilience of the Nigerian banking sector was put to the test as elevated risk concerns triggered a spike in NPL ratio and slowed the pace of credit expansion dramatically.
Gross loans and advances dipped by 1.9 percent in 2015, compared to the 26.6 percent growth in 2014, as lower oil prices, foreign exchange volatility and liquidity concerns dampened risk appetite amidst a hazy economic road map.
Fitch, an international ratings agency, had acknowledged that banks in the country had experienced a sharp rise in non-performing loans (NPLs), adding that other key concerns in the banking industry included forex scarcity, weakening capital adequacy ratios, and the sovereign’s ability to support banks, given its weaker financial flexibility. Insisting, “If current challenges do not ease, the banks could face further downgrades.”
However, the CBN as well as the Nigeria Deposit Insurance Corporation (NDIC) continued with their insistence that the Nigerian banking industry was strong. According to the Director, Banking Supervision, CBN, Tokunbo Martins, while the banking sector is feeling the economic headwinds, “like every other jurisdiction. It is not strange.
“Non-performing loans (NPLs) at 11 percent is not what we need to focus on. What we need to focus on is if the banks have the capacity to absorb losses that may arise from those NPLs? And the answer is yes. They have very strong capital buffers.
“Another thing that is important is that Nigerian banks have very huge capacity to generate income to also absorb those losses, if they do arise. And then the loans that are non-performing, can they re-perform? Yes they will because the underlying assets are still there and they are good.
“The fact that the country has NPLs at a period like this should be expected and is not a thing that any jurisdiction should be demonised about. Other jurisdictions going through what we are also going through are experiencing the same thing. There are countries that have NPLs as high as 15 per cent, some 30 per cent, and some countries in Europe have NPLs as high as 80 percent.”
In view of the current macro-economic challenges in the country, the CBN had granted a one-off forbearance to banks this year to write-off their fully provided NPLs without waiting for the mandatory one year.