The economy has been contracting and is on its way to an inevitable recession in the 2nd Quarter GDP. Although we believe the recent news of favourable foreign exchange policy is about to lift the market. Prior to this news, different sectors have employed means to adjust to the prevailing macro environment – inflation reaching a peak of 15.6% in May 2016 (this is at a 6 year high), Q1 GDP negative growth of -0.36%, the first negative growth in 25 years, slowing demand and volatile exchange rate amongst other factors.
Different players reacted differently, most hiked prices – passing the increase in costs to consumers. Some laid off staff to reduce its costs and maintain current prices to stay competitive. Perhaps, in the first quarter of 2016, 520,000 people lost their jobs.
The financial market isn’t left out as the news of retrenchment engulfed the banking sector. Skye bank laid off 200 staffs, Ecobank fired 1040 of its staff while Diamond bank sacked 200 staffs. The Banking sector which plays a role in creating jobs with its branches littered all over the country is feeling the crunch for a myriad of reasons.
Deposit Money Banks have reduced their loan growth projections for the 2016 financial year, following the increase in non-performing loans occasioned by economic challenges facing the country. Non- performing – debtors defaulting on payments due to pressure on its cashflow. Commercial banks have posted large impairment charges (bad debts) in their 2015 financial results released in March.
Why does this matter? Banks are in the core business of lending money. Its key source of revenue – interest income from money loaned – is hugely impacted if it is not growing its loan books due to the risk prevalent in the economy. For instance the loan asset of Nigerian banks ( depositor’ money) Oil & Gas constitutes of N3.3 Trn while Manufacturing is N1.85 Trn. Oil and gas sector has been under a siege owing to a drop in oil prices, a devaluation of its assets and more recently the vandalism of its infrastructure and a drop in oil production. What this means is the loan book that is exposed to this sector is at risk. The risk of recovering the capital lent and also the interest that accrues to it.
The foreign exchange challenges that lingered prior to new policy had forced some foreign banks to cut credit lines to Nigerian banks. So there was the concern of inability to meet obligations when due – banks defaulting to repay because they were constrained. All of this played a role in slowing down the sector
The amount of bad loans in the banking industry rose by 78.8 per cent to N649.63bn in 2015, indicating severe deterioration in the quality of the loan portfolio of the 22 banks. So although banks extended 30% less new loans than they did in 2014, it still saw a significant jump in bad debts due to exposure to certain sectors and the weak macroeconomic environment
Another factor is the foreign currency portion of its loan book. For instance, let’s say the foreign currency loan book value is N1.6 billion when the Naira was trading at N160/$. After the devaluation, let’s use an average of N250/$, the value of the loan book is N2.5 Billion but the banks will only receive the N1.6 Billion. Without exposing itself to additional risk, their loan books will rise and they will need to augment their Naira income to meet the shortfall. If the foreign currency loans are used to fund Naira assets, the banks would have to take a hit on profit and loss
Lastly, The TSA which is a single treasury account and has a consolidated revenue account to receive all government revenue and effect payment through it also dried up. Which means, although banks are still the receiving channel for all government revenue, it has to remit the balance of government funds at the end of each banking day. This saw approximately N2.2 Trillion leave the coffers of the deposit money banks to the central bank.
We hope all these developments should instead of a slump trigger a paradigm shift in banking in Nigeria as the foreign exchange dynamics have been addressed. This should drive innovation to mobilise deposits from the private sector, derisk of certain sectors such as SMEs to spur lending to the real economy amongst other. The game has changed and all players should adjust to the tune.