Bank NPLs (5) - How Banks Fared In 2018; Holding Up Against IFRS9 Tropical Winds

Wednesday, May 20, 2020 06:50 AM / by Debtors Africa/ Header Image Credit:  EcoGraphics

The Nigeria banking sector faced harsh challenges in 2018 as growth in the gross domestic product ("GDP") stalled in the face of falling Inflation and tighter monetary policy. GDP in 2018 grew by a sluggish +1.93% while Inflation closed the year at a modestly high +11.44%. But not only did GDP growth rate hit a large speed bump; the unemployment rate equally soared to scary heights as the industry lost most of its steam. The unemployment rate rose by +23.1% in Q3 2018 as against +18.8% in the same quarter a year earlier.  Underemployment rate equally rose to +20.3%. The combined unemployment and underemployment rate for Nigeria in 2018 was therefore +43.4%; easily one of the worst in Africa.

With high domestic Lending rates, local investment faltered and the high yields on the federal government ("FGN") bonds and bills crowded out private sector access to the money and capital markets in the year. The rise in domestic interest rates led to lower lending portfolios and a rise in the proportion of non-interest income to total bank income in 2018. Higher interest rates also resulted in banks being able to increase customer deposits, although most of the new gains in retail deposit accounts are better associated with greater financial inclusion than retail customers searching for higher-yield savings assets.  

As a group the banks had to cope with the following issues in 2018:

• Slower lending growth
• Higher cost of deposit liabilities
• IFRS9 provisions (dealing with provisions for bad loans)
• 1AS21 provisions (dealing with appropriate exchange rate conversion)
• Pressure from Fintech companies providing alternative payment solutions
• Non-bank financial services offered by large retailers such as Telcos
• Regulatory oversight and monetary policy tightening
• Large Non-Performing Loans
• Declining Shareholder Funds and growing need to recapitalize

On the Bright Side 

• Banks saw a rise in profits before tax (mainly as a result of declining provisions)
• Non-interest Incomes of the majority of banks grew sizably in 2018, thereby stemming dependence on commercial loans for added income
• The cost of Risk (CoR) declined as banks became more risk-averse. A caveat to this observation is that a large slice of the non-interest incomes in bank books showed up as contingent liabilities which could crystallize into losses thereby adversely affecting their bottom lines going forward.

Related Reports (PDF)

1.      Download the Full PDF Report - Debtors Africa, May 13, 2020

2.     Executive Summary PDF - Proshare, May 14, 2020

3.     AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018

Related News

1.      AMCON and Financial Services Debt Burden in Nigeria - Aug 17, 2018

2.     Bank NPLs (DR 1) - The Case for a New Industry Approach 

3.     Bank NPLs (2) - The Banking Industry and Its NPL Position

4.     Bank NPLs (3) - The State of NPLs

5.     Debtors Africa Launches Searchable Digital Database of Recalcitrant and Delinquent Debtors

6.     Bank NPLs (4) - A Short History of Recovery Efforts - A Time Series Analysis