Nigeria: Q1’2020 – Banks’ Losses to Bad Loans Double

Reflecting the impact of the Coronavirus (COVID-19) pandemic and devaluation of the Naira, financial performance, banks’ losses to bad loans shot up by 99 percent in the first quarter of 2020 (Q1’2020), which caused profit growth rate to fall by 29 percent.

Financial Vanguard analysis of the financial results of nine out of top ten banks for the first quarter ending March 2020 showed 19.7percent year-on-year, YoY, increase in profit before tax, PBT, to N263.51 billion in Q1’20 from N243.8 billion recorded in Q1’19. This increase, however, represents 7.9 percentage decline in the profit growth rate when compared with the 27.6 percent, YoY increase recorded in Q1’19, from N216.2 billion in Q1’18.

The nine banks includes the five tier-1 banks which are Access Bank, First Bank, GTBank, UBA and Zenith Bank, and leading tier-2 banks which includes Fidelity Bank, Stanbic IBTC Bank, Ecobank Nigeria and FCMB.

Analysis revealed that the slowdown in profit growth was occasioned by sharp increases in losses to bad loans (loan loss expense) which rose to N36.1 billion, from N18.1 billion in the corresponding quarter of 2019 (Q1’19), representing 99 percent year-on-year (YoY) uptick.

Consequently, loan loss expense as a share of PBT rose by 85 percent, YoY to 13.7 percent in Q1’20 from 7.4 percent in Q1’19, indicating more of the banks’ profits were consumed by losses to bad loans.

IMF cautions CBN

Meanwhile, the International Monetary Fund, IMF, has cautioned the Central Bank of Nigeria (CBN) against any attempt to relax loan classification and loan provisioning standards in a bid to moderate the impact of COVID-19 pandemic on the level of non-performing loans (bad loans) in the banking industry.

It in its review of the policy responses of the CBN to the likely impact of COVID-19 on the banking industry, IMF said: "To be able to withstand large liquidity shocks, the CBN should intensify its monitoring of banks’ liquidity, particularly in foreign currency, and release the high effective CRRs as needed.

"Staff also supports the CBN in having banks consider temporary restructuring of loan terms but cautions that such relief should be provided only to fundamentally sound borrowers. In any case, loan classification and provisioning standards should not be relaxed.

"The CBN should also continue to strictly enforce the prudential FX exposure limits. Cross-border contagion risk will be reduced by having Nigerian banks’ foreign subsidiaries hold additional capital cushions well beyond local capital requirements, which lessens the need to support […]

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