Banks non-performing loans hit 14% in 2016 – CBN

Due to macroeconomic challenges including increase in inflation rate, negative Gross Domestic Product (GDP), among many other factors have contributed to the Deposit Money Banks (DMBs) Non-Performing Loans (NPLs) to gross loans at 14 per cent in 2016, the Central Bank of Nigeria (CBN) latest Financial Stability Report (FSR) has revealed.

The report showed that depreciation of Naira in commercial banks NPLs to gross loans in 2015 closed at 5.3 per cent from five per cent in the second half of 2015.

The apex bank in its new financial stability report disclosed that ratio of core liquid assets to total assets increased by 2.3 percentage points to 16.3 per cent in 2016 from 14 per cent recorded at half year ended June 2016.

It further noted that the ratio of core liquid assets to short-term liabilities increased by 2.9 percentage points to 24.5 per cent in 2016, compared with 21.6 per cent in second half of 2016.

“The increase in the ratio of core liquid assets to both total assets and short-term liabilities reflects improved buffers to absorb short term obligations,” the financial stability report of CBN explained.

According to the report, the banking industry stress test carried out in 2016, covered 23 commercial and merchant banks, to evaluate the resilience of the banks to credit, liquidity, interest rate and contagion risks.

The financial stability report noted that the banking industry was categorised into large assets with greater than or equal to N1 trillion; medium banks with assets greater than N500 billion but less than N1 trillion and small banks with assets lesser than or equal to N500 billion.

The report considered a baseline Capital Adequacy Ratio (CAR) for the banking industry, large, medium, and small banks stood at 14.78, 15.47, 12.75 and 3.14 per cent, respectively

The report stated that, “The economic headwinds have adversely impacted bank borrowers, resulting in rising NPLs which required additional provisioning by banks, thereby reducing the banks’ CAR.

“The decline of the CAR of small and medium banks did not weigh significantly on the industry CAR because large banks hold a significant proportion (88.02per cent) of total banking industry loans.”

“The ratio of non-performing loans net of provision to capital for the banking industry increased to 38.4 per cent in 2016 from 28.4 per cent as at second half of 2016.”

Explaining further on banks solvency stress test, the report said: “The post-shock stress test results showed that a 100 per cent increase in NPLs will lead to a CAR of 10.55, 12.01, 10.34 and -27.03 per cent for the banking industry, large, medium and small banks, respectively.

“The results revealed that all the groups except small banks can withstand a 100 per cent increase in NPLs. However, none of the groups could sustain the impact of the most severe shock of a 200 per cent increase in NPLs as their post-shock CARs fell below the 10 per cent minimum prudential requirement.

“The impact of the severe shock scenario will result in a decline of CAR to 5.87, 8.25, 7.80 and -84.50 per cent for the banking industry, large, medium and small banks, respectively.

“The banking industry and the peered-groups showed a high level of credit concentration risk as their respective CARs fell below 10 per cent under the shocks of deterioration in the quality of the risk assets.

“If the five biggest corporate obligor credit facilities shifts from Sub- standard to Doubtful, the CARs fell to 7.89, 8.84, 5.16 and -8.93 per cent for banking industry, large, medium and small banks, while if the five biggest corporate obligor credit facilities shifts from Doubtful to Lost, the CARs fell to -0.21, 1.09, -3.88 and -24.44 per cent, for the corresponding categories, respectively”.

According to the report, banking industry total credit by sector showed that Oil & Gas sector constituted 29.59 per cent of total banking industry credit, while Manufacturing, General, General Commerce, Government and Others, constituted 13.41, 8.71, 6.25, 8.34 and 33.70 per cent, respectively, in 2016.

“The stress test result of a 20 per cent default in oil and gas exposures will lead to CARs of 13.98, 14.67, 11.87 and 2.63 per cent for the banking industry, large, medium and small banks, respectively.

“However, with a more severe shock of 50 per cent default in exposure to the sector, only the large banks will have CAR of 10.17 per cent which is above the regulatory threshold. This showed that medium and small banks have more oil and gas credit concentration risk than the large banks, despite their smaller proportion of exposure to the sector.”

The report noted that liquidity stress tests were conducted using the Implied Cash Flow Analysis (ICFA) and Maturity Mismatch/Rollover Risk methods, to assess the resilience of individual banks and the banking industry to both liquidity and funding shocks.

According to the financial stability report of CBN, “The tests revealed that after a one-day run, the liquidity ratio for the industry would decline to 30.2 per cent from the 44.4 per cent pre-shock position and, to 9.73 per cent and 6.76 per cent after a five-day and cumulative 30-day run, respectively.

“Similarly, a 5-day and cumulative 30-day run on the banking industry would result in liquidity shortfalls of N2.1 trillion and N2.3 trillion, respectively.”

While giving details on unsecured interbank banks exposures, the report revealed that one bank was central in the network, as it was exposed to more than two counterparties in the system, while a review of secured transactions showed that five banks were central in the network as they had three or more bilateral exposures.

“Overall, the result indicated the potential for high contagion risk through unsecured interbank exposure as three banks (including two Systemically Important Banks) failed CAR after a 100 per cent default shock,” the report said.

Enhancing supervision of Domestic Systemically Important Banks (D-SIBs), the report revealed that eight banks earlier designated as D-SIBs retained their status during the period under review.

“These banks were required to meet more stringent prudential regulations to reflect their systemic importance.
“At end-December 2016, the D-SIBs accounted for N20.87 trillion (69.06per cent) of industry total assets of N30.22 trillion.

“Similarly, the D-SIBs accounted for N13.04 trillion (70.25 per cent) of total industry deposits of N18.56 trillion and N11.76 trillion (72.2per cent) of the aggregate industry loans of N16.29 trillion.

“During the review period, the banking sector witnessed a rise in non-performing loans due to weakening economic conditions with four D-SIBs recording NPL ratios above the regulatory limit of five per cent. The CBN directed the D-SIBs to take appropriate actions to address the breach.”

In a statement, the CBN governor, Mr. Godwin Emefiele said: “The continued demand pressure on the naira and persistent supply constraints remained a key challenge in the foreign exchange market. Inflationary pressures compounded market conditions necessary to attract foreign capital required for the sustenance of exchange rate stability.

“The banking sector witnessed major challenges from the negative domestic output growth, deteriorating macroeconomic indicators and global uncertainties. However, the banking sector remained safe and resilient despite these challenges.”

Also, the apex bank spokesman, Mr. Isaac Okorafor, said the macroeconomic economic situation affects banks too and not limited to Nigeria.

“Indeed Nigerian banks are doing much better than those in other commodity exporting and emerging economies. The ability of banks to withstand dwindling incomes and harsh conditions is not limitless.

“With growth picking up and the improvements in the forex market we are confident that we will sail out of this troubled waters soon”, he explained.