Tier-1 Banks Account for 47% of Industry’s Impaired Credits

The performance of the Nigerian banking industry is largely dependent on the macroeconomic environment, as well as the performance of the top five banks, a report has stated.

The Banking Industry report by Agusto & Co. obtained wednesday also showed that about 47 per cent of the banking industry’s impaired loans are collectively held by the top five banks.

The top five banks in Nigeria are Zenith Bank Plc, Guaranty Trust Bank Plc, FirstBank Nigeria Limited, United Bank for Africa Plc, and Access Bank.

According to the report, the impaired loans were mainly in the oil & gas, transport & communication sectors, accounting for 37 per cent and 11 per cent respectively of the industry’s total classified loans.

In the oil & gas space, also disclosed in the banking sector report, the top five banks accounted for 60 per cent of the loans disbursed to this sector, “which heightens concentration risks.”

A breakdown of the oil and gas sector loan disbursement showed that the top five banks granted over 66 per cent of the banking industry’s total exposure to the upstream; 64 per cent of total exposure to the midstream and 73 per cent of the total loans granted to the downstream.

“On an average, each of the top five banks have disbursed over N500 billion to the oil & gas sector. This makes them vulnerable to the financial performance of this sector which has been enfeebled by global circumstances.

“Of the impaired loans to oil & gas sector (about 37%), the top five banks account for 77 per cent of these impaired loans. These loans largely granted in foreign currencies were further exacerbated by the volatility of the domestic currency.

“There have been arguments that given the sheer size of the top five banks’ loan book, they will continue to account for a sizeable chunk of the banking industry’s impaired loans especially in periods of weak macroeconomic fundamentals,” the report stated.

The top five banks also account for 57 per cent of the industry’s total assets.
The last two years saw intense weakening of the macroeconomic fundamentals against the backdrop of lower crude oil prices – Nigeria’s major revenue source – and the unorthodox demand management in the foreign exchange market.

“However we believe that these industry leaders need to strengthen risk management framework particularly in the areas of concentration risk, early warning signals and enhanced oversight governance.

“The undue concentration to oil and gas could become the Achilles heel for the top five banks. Crude oil, like most other tradable commodities has boom and bust cycles which are quite difficult to predict,” the report stated.

According to Agusto & Co, to mitigate risks in the industry, Nigerian banks will need to adopt time tested values.

“In December 1863, Hugh Mc Cullock, then Comptroller of the currency and later Secretary of the Treasury in the US, addressed a letter to all national banks. In the letter he said, “distribute your loans rather than concentrate them in a few hands,” the report stated.

It warned that concentration risks in oil and gas (downstream) and margins trading (equities) led to the 2008/2009 banking crisis in Nigeria which led to the nationalisation of some of the most vulnerable institutions and the bailout of the industry.