The 2017 edition of the annual Nigerian Banking Sector Report by Afrinvest (West Africa) Limited has shown that a total of 14 banks recorded 91.8 per cent increase in impairment charges as a result of weaker asset quality and the one-off forbearance on writing off fully provisioned loans granted by the Central Bank of Nigeria (CBN) in 2016.
A loan is considered to be impaired when it is probable that not all of the related principal and interest payments will be collected.
The report, set to be presented at the London Stock Exchange (LSE) on Friday, also shows that consequent on higher interest and non-interest income, the gross earnings recorded by the lenders rose faster at 16.4 per cent in 2016 financial year better than 10.4 per cent recorded in 2015.
The presentation of the report is scheduled as the anchor event of the Nigeria Banking & Investment Forum: Capital Markets Partnership hosted by the LSE in collaboration with the Nigerian Stock Exchange and in partnership with Afrinvest.
Governor of the Central Bank of Nigeria(CBN), Godwin Emefiele, has been confirmed as the special guest of honour.
Addressing journalists during a briefing Friday in Lagos, Ike Chioke, Group Managing Director of Afrinvest, explained that this year’s report titled “Nigeria Reopens for Business” is timely and instructive, as it is being launched at an important phase in the country’s economic resurgence, following the recent exit from a four-quarter long recession.
Also, the firm noted that profitability metrics improved as industry Profit Before Tax (PBT) expanded 9.8 per cent in 2016, an improvement from a 28.4per cent decline recorded in the prior year, while Return on Equity (ROE) strengthened to 12.3 per cent from 9.1 per cent in 2015.
Similar to earnings performance, the impact of prudential guidelines and monetary policy reflected on balance sheet and capital adequacy of banks.
Following the devaluation in June, capital adequacy level took a hit as foreign exchange (forex)-denominated risk weighted assets were revalued upwards while the CBN gave banks a soft landing by relaxing prudential rules, the firm stated in its executive summary.
“The effect of currency depreciation was also evident in the industry gross loan book, which grew nominally by 23 per cent year on year (Y-o-Y), given that 39.5per cent of industry loans are foreign currency denominated. In addition, Total Deposits grew 19.3 per cent in 2016, following a decline of 1.8 per cent in 2015, while total assets and total liabilities expanded 20.7 per cent and 21.8 per cent respectively.
“We are proud to launch the 2017 Nigerian Banking Sector Report before a host of international economic and financial market experts in London on the back of the nation’s recovery from recession, and we are confident that it would further enhance appreciation of Nigeria’s financial services sector,” Chioke stated.
Given the more or less resilient earnings performance, majority of the banks maintained their dividend policy with an average pay-out ratio of about 33 per cent and investors netted alpha as the banking index outperformed the market benchmark.
Considering these factors, “our outlook on the sector for the rest of the year and 2018 is broadly positive although we note that crystallization of asset quality risk still poses a threat to the sector, given that the economy is still recovering from a recession and banks loan book is heavily skilled to high risk sector – Upstream Oil & Gas, Manufacturing, General Commerce and Power sectors,” the firm noted.
Majority of Nigerian banks have demonstrated their resilience within the last two years amid macroeconomic challenges which weighed on credit expansion, asset quality and capital adequacy, to record largely positive performances for the year. The financial performance of the sector was principally affected by monetary policy decisions tied to the management of the FX market which had a ripple effect on earnings across the industry. This was positive for banks’ non-interest income, especially Tier-1 lenders with aggregate long Net Open Positions (i.e. higher foreign currency denominated monetary assets than liabilities) which recorded massive jumps in FX revaluation gains. Furthermore, in a bid to attract private capital flows and shore-up the Naira and external reserves, the CBN drove up policy and market interest rates, resulting in higher fixed income yields which bolstered interest income for banks.