Zenith Bank records N71.37bn bad loans in 2016

Following the poor state of power sector and dwindling global oil prices, Zenith Bank Plc has reported N71.37 billion bad loans in financial year ended December 31, 2016. The lender in 2015 reported N44.89 billion bad loans, 59 per cent increase above 2016 bad loans. With the growth in bad loans in 2016, the lender’s Non-performing loans (NPLs) moved to three per cent in 2016 as against 2.2 per cent recorded in 2015.

Zenith Bank gross loan in 2016 rose by 16 per cent from N2 trillion last year to N2.36 trillion in year under consideration while impairment rose significantly by 104.6 per cent to N32.50 billion as against N15.67 billion recorded in 2015. Key contributors to Zenith Bank’s bad loans in 2016 include investment in Power General Commerce and Oil & gas sectors.

The Group bad loans in the power added N30.7 billion, 43 per cent of N71.36 billion recorded in 2016. General commerce and Oil & gas contributed N13.22 billion and N10.8 billion respectively. The bank explained that it has put in place hedges against drop in crude oil price for customers with loans, encourage customers to increase production capacity to generate more cash flows and customers are advised to diversify into gas production

Other guide against delinquent loans by Management of Zenith bank in the Oil & gas sector include restructuring of loans in line with expected cash flow. Also, loans in the Power Sector, the bank supported customers with other thriving businesses. Zenith Bank advanced loans to Distributing Companies (DISCOs) with high cash generating capacity.

“While loan book growth may remain uninspiring due to weak economic growth, we expect banks to continue to benefit from the higher yields and interest rate environment which should be supportive of net interest margin (NIM) performances,” the Bank in a statement to investors added.

However, a group of analysts at Investment One Research in a report had said the difficult macro environment, n addition to the disruptions to oil production (negatively impacting the quality of loans to Oil & Gas companies), bad loans may increase further. According to the Lagos based analysts, “This may keep loan impairment charges high in the immediate as banks try to maintain adequate bad loans coverage.

“Conversely, if the administration adds more flexibility to its foreign exchange policy, we may see the local currency depreciate further at the interbank market. Although this should boost foreign exchange related gains and income, it may also lead to an expansion in risk assets. “This may pressure capital adequacy levels, particularly for tier 2 names, thereby increasing the need to raise fresh capital to maintain adequate buffers.

The company explained that the weak economic environment, foreign exchange scarcity, in addition to the fragile situation in the Niger Delta, which may negatively impact upstream Oil & Gas asset quality despite the recent restructurings, may put further pressure on the sector’s bad loans ratio. “This should see loan impairment charges remain high as banks try to maintain adequate coverage,” the company explained.