Fragile Economy, Politics, Hitting Nigerian Banks - Emerging Market Views

Fragile Economy, Politics, Hitting Nigerian Banks

Nigerian banks are struggling to find quality borrowers in an economy marred by political uncertainty.

Rising political tensions heading into the 2019 presidential elections in Africa’s most populous nation and fragile economic activity, are forcing banks to remain cautious and conservative with credit creation, thus cutting their loan books and contradicting earlier guidance.

Lenders largely forecast 10 percent loan growth during investor presentations at the start of the year.  A 10 percent loan book growth in one year translates to an average of 2.5 percent growth per quarter.

Despite already looking complicated as early as the first quarter of the year, when average loan growth was -5.2 percent (which meant lenders most grow their loan books by 4 percent for the next three quarters), the situation has become even worse in the second quarter as contracting loan books persist.

Tier one lenders, Zenith and First Bank, saw loans and advances to customers decline 10.8 percent and 7 percent to N1.87 trillion and N1.86 trillion respectively as at the end of June 2018, from N2 trillion for both banks as at the end of 2017. Tier-two lenders, FCMB and Diamond bank, also posted negative loan growth, with FCMB recording a 9.95 percent contraction to N23 billion from N26 billion in the period under review, while Diamond bank’s loan book dipped 3.68 percent to N727 billion from N755 billion.

Sterling Bank was the only bank to buck the trend, growing its loan book by less than 1 percent to N628 billion from N598 billion in the period under review. “The onset of political activities came earlier than expected and economic activity remains fragile at best, making it almost impossible for banks to create credit assets,” said Johnson Chukwu, the managing director and CEO of Lagos-based financial advisory firm, Cowry Assets.

After recovering from its first economic recession in 25 years in 2017, the economy grew 1.95 percent in the first quarter of 2018 thanks to higher oil prices and production, with the IMF forecasting growth of 2 percent for full-year.

However, economic growth that is below the rate at which the population is growing (3 percent) means the GDP per capita will shrink for the third consecutive year in 2018. The IMF expects it will shrink eight years straight. “The ruling party had conventions that created hiccups and there have been mass defections that have added to an already heightened political uncertainty,” Chukwu said. “Remember the banks are also keen to reduce their non-performing loans and the current environment is risk-laden.”

Nigeria’s 2019 general elections look set to be one of the most tightly contested since the return to democratic governance, especially as the opposition People’s Democratic Party (PDP) seeks to return to power after being defeated in the last general elections by the All Progressive Congress (APC).

This has taken a new twist following the recent coalition by the PDP and 38 other political parties to field a single candidate to pose a formidable challenge to the incumbent. More than fifty lawmakers and two state governors have quit the APC in the past week, with the vast majority switching allegiances to the PDP.

Both parties have struggled with internal divisions but the mass defections seems to be breathing new life into PDP which ruled for 16 years (since the end of military rule in 1999), prior to President Muhammadu Buhari’s election in 2015. Aside the elevated political tensions, the fragile economic activity does little to make a case for banks to extend more loans. The banks, which largely mirror the health of the economy, are also in a better place than they were in the thick of 2016’s crisis.

Oil prices have held above $70 per barrel for two months and that has seen non-performing loans improve given that oil sector loans account for the largest share of the bank’s loan books. Brent crude for 3-month settlement sold for $73 per barrel as at September 3, according to Bloomberg data. During Q1 2018 investor conference calls, most banks admitted to seeing a gradual recovery in non-performing loans.

“Banks will need to aggressively grow loans by an average of 4.3% per quarter to be able to catch up with their FY’18 targets, which we think is unrealistic, as banks are more likely to be cautious with loan growth in light of the still fragile economic fundamentals and the looming elections,” analysts at Cardinal Stone partners said in a note to clients.

Banks will also be risking higher impairment charges if in the bid to grow loans, they book sub-optimal and low-quality credit assets, following the adoption of IFRS 9 model- designed to help lenders better guard against bad loans, the Lagos-based investment bank said.

“We expect average loan growth for FY’18 to come in at 5.0%, with banks like ACCESS and GUARANTY growing their credit assets the most by 7% and 5% respectively. On the other hand, we expect loan growth for banks like ZENITH and FCMB to be negative in FY’18.”

Worried by commercial banks’ inability to lend to the real sector, the Central Bank of Nigeria Governor Godwin Emefiele at the last Monetary Policy Committee (MPC) urged corporates to raise commercial papers as an alternative to bank loans.

The plan could see the CBN take up the role of corporate lender from commercial banks, while the banks turn lender to the CBN by piling into OMO auctions and treasury bills.“The CBN is now sending mixed signals because it has reached its wits end and is keeping MPR high because it must assure foreign investors that they can still get high yields on their investment,” Nonso Obikili, an economist, said via his twitter handle.

Meanwhile, the apex bank has slowed down Open Market Operations (OMO) issuance, thus keeping systemic liquidity high. “There is liquidity, so businesses should be booming, yet we are tottering around the possibility of a double dip recession because the transmission mechanism is broken,” Obikili said.

The CBN has kept benchmark lending rates at a record 14 percent for two years now, citing the need to maintain exchange rate stability (by luring foreign portfolio investors with attractive yields) and keep price growth in check. That is despite headline inflation rates slowing every month since February 2017, decelerating to 11.23 percent in June 2018.

“One of the things we need to grow the economy is lowered lending rates. But banks cannot lower their lending rates because they are benchmarked to the MPR,” Obikili said.

Photo Credit: Bloomberg