Bad loans: 10 Banks loans provision drop by 56.7% to N235.75bn in 2018

…Decline in impairment charges, a theme for tier 1 banks in 2018-Analysts

…’Non-compliance by banks will make it inevitable for auditors to qualify accounts’

Motolani Oseni

A total of 10 commercial banks in Nigeria have reduced their bad loans provision by 56.7 per cent to N235.75 billion in 2018, as against accumulative N544.6 billion loan loss provisions by the lenders in 2017, The Daily Times findings revealed.

However, stability in the global oil prices was said to be responsible for the improved loan’s repayment.

But our checks showed that the 10 commercial banks recorded a significant decline in bad loans provision (impairment charges for losses) in 2018 financial year.

Opposing the implementation of the International Financial Reporting Standard (IFRS) 9 by the International Accounting Standards Board (IASB) to increase impairment charges, lower provisions have been made by these commercial banks operating in the country.

The 10 commercial banks considered are Ecobank Transnational Incorporated Plc (ETI), Access Bank Plc, Guaranty Trust Bank Plc (GTBank), Zenith Bank Plc, FBN Holdings and United Bank for Africa (UBA) Plc.

Others are Fidelity Bank Plc, Unity Bank Plc, FCMB Group Plc and Sterling Bank Plc.

The breakdown by our correspondent revealed that ETI reported 34.8 per cent loan loss provision in 2017 from N125.89 billion to N82 billion in 2018 while Access Bank recorded impairment charges of N14.65 billion in 2018, down by 57.5 per cent from N34.5 billion in 2017.

Also, GTBank’s provision declined by 59.6 per cent from N12.2 billion in 2017 to N4.9 billion in 2018, while Zenith Bank ended 2018 with loan loss provision charges of N18.37 billion compared with N98 billion in 2017.

And FBN Holdings reported a 42 per cent decline in loan loss provision to N86.9 billion in 2018 from N150.4 billion in 2017.

However, FBN Holdings had explained to investors/analysts that, “impairment charge for losses declined by 42.2per cent to N86.9 billion in 2018 (2017: N150.4 billion) as we continue to focus on remediation and recovery activities towards improving asset quality.

“Consequently, the cost of credit risk decreased to 3.5per cent (2017: 6.4per cent).

“We remain committed to materially resolving legacy non-performing loans and achieving a single digit NPL ratio in the current financial year.”

In addition to Tier-1 bank loans lose provision, UBA reported 86 per cent decline in loans loss provision to N4.5 billion from N32.9 billion reported in 2017.

Consequently, Fidelity Bank reported a 62.7 per cent decline in impairment charges for losses to N4.2 billion from N11.3 while Unity Bank last year reported N161.2 million impairment charges for losses, 99.6 per cent decline from N44.25billion reported in 2017.

In addition, FCMB group impairment charges for losses moved from N22.7 billion to N14 billion while Sterling Bank impairment charges for losses dropped by 52.4 per cent to N5.8 billion from N12.27 billion reported in 2017.

Market watchers have expressed that commercial banks deliberately reduce impairment charges for losses to boost profitability, stating that 2018 was not a profitability year for commercial banks over the buildup to 2019 general election and low yields on government securities.

Commenting on this development, Financial Engineer/CEO at Wyoming Capital & Partners, and a Consultant/Dealer with Valmon Securities Limited, Tajudeen Olayinka said: “You must understand that the need for loan loss provisions by banks in Nigeria is statutory, and banks cannot deliberately reduce it in their books to pave way for overstating their profit figures.

“Non-compliance to prudential guidelines by banks will make it inevitable for auditors to qualify accounts of any erring bank.”

Furthermore, he said: “The thing that can explain the reduction in loan loss provisions in 2018 as compared to 2017 figure is the observed reduction in loans to the private sector and state & local governments by as much as 4.24per cent in 2018.

“If you go further to consider banks’ holding of liquid assets, you will notice that the industry statistic went up to 65.0per cent in Q4 of 2018, from 54.8per cent in Q4 of 2017.

“The prescribed minimum was 30per cent in both years. This is an indication that deposit money banks were wary of putting more money in risky assets in 2018 because of fear of defaults and the state of the economy, some other factors around the economy.”

Analysts at Cordros Capital Limited had said the decline in impairment charges has been a theme for all tier 1 banks in 2018.

The Lagos based firm noted that despite the implementation of IFRS 9, banks have continued to cautiously lend to the real sector of the economy.

They expressed that “This is as a result of the banks’ cautious approach to loan creation, after the significant deterioration in asset quality experienced during the crux of the economic recession in 2016-2017 when oil prices took a nosedive.

“In fact, what we have seen is a contraction in loan books, as obligors have improved in their loan pay-downs, following the improved economic conditions and rising oil prices.”

The analysts explained that it was also worth stating that the treatment of IFRS 9 initial adjustment via equity has cushioned its impact on the income statement.

“Overall, these have contributed significantly to the sharp drop in impairment charges, particularly for the tier 1 banks,” they declared.

IFRS 9 addresses the accounting for financial instruments and it contains three main topics: classification and measurement of financial instruments, impairment of financial assets and hedge accounting.

It will replace the earlier IFRS for financial instruments, IAS 39, when it becomes effective last year.