Experts at the Guaranty Trust Bank (GTB) have said that harmonization and implementation of the right policies (both fiscal and monetary) will optimize various fundamentals that are contributing to the high Non-Performing Loans (NPLs) in Deposit Money Banks (DMBs) in the country.
With the NPLs having exceeded the Central Bank of Nigeria (CBN) benchmark of five (5) percent, they believe this will help in stimulating economic activities and maximizing productivity, which appears to be the missing presently.
It is worthy of note that the ratio of non-performing loans in the banking industry have doubled the threshold currently at 11.7 percent.
They disclosed this in their 2017 Economy Outlook, titled: Macroeconomic and Banking Sector Themes for 2017 said the banking industry has been plagued by declining asset quality in the wake of the decline in crude oil prices, devaluation of the naira and FX scarcity, with ratio of non-performing loans rising to 11.7percent from 5.3percent in Dec 2015. The bank worked out two scenarios that will determine the recovery or otherwise of the economy in the 2017.
“For the purpose of this publication, we consider two (2) scenarios: First Scenario: Oil prices remain circa US$57pb levels and the successful resolution of the militancy attack on oil facilities in the delta region (best case). Second Scenario: Oil prices crash below US$40pb and the attacks on oil facilities continues following the inability of government to resolve issues with the militants (worst case).
The analysts said the oil and gas loans alone account for about 30percent of total industry exposure, “an improvement in oil sector receipts as detailed in scenario 1 will provide relief for banks, enhance repayment of obligations and improve asset performance.”
“FX scarcity and epileptic economic activities is further constraining earnings. With the first scenario successfully achieved, the system liquidity will improve and banks will witness better asset performance as customers will be able to meet the repayment of maturing loan obligations which raise earnings. Conversely, scenario 2 will see system illiquidity situation linger further into the year and asset quality deterioration will impact the industry.
On the capitalisation of the banks, the analysts said with banks reeling under the pressure of naira devaluation and earnings challenges, capital adequacy buffers might have been eroded below minimum regulatory requirement level.
“In view of the full compliance to Basel II in the computation of capital adequacy ratio (CAR), and the possibility of further asset quality deterioration occasioned by loan loss provisioning implications, it is not unlikely that banks might have to raise additional capital to stay within the 15percent minimum capital requirement of the CBN. There may then be considerations for a reduction in this requirement or forbearance as the current market conditions are unsuitable for a capital raise.”
The bank concluded that despite the beating the Nigerian economy has taken in the last 24 months, one thing is still clear; the fundamentals of the economy, which include the market size, population, enterprise competency of Nigerians, demographic, natural resources etc., are still very strong.