Militant attacks may impact banks oil and gas books; GTBank, FBNH at most risk?

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Thursday, June 09, 2016 4:55PM / CardinalStone Research

Oil production significantly down from militant attacks, banking sector under pressure

Recent militant attacks on oil and gas assets in the Niger Delta (specifically in Bayelsa and Delta States) have raised concerns about asset quality of Nigerian banks, especially those with significant exposure to the oil and gas sector. As at Q1'16, the total exposure of the banks in our coverage (with the exception of Stanbic IBTC, Skye Bank and ETI) to the upstream oil and gas sector is about N1.3 trillion.

Of this amount, FBN Holdings, GTBank, Zenith Bank, UBA and FCMB have the highest absolute exposure and account for 75%. In the last 2 years, a weak oil price has made many banks restructure their upstream oil and gas loans, adjust the payment streams and in some cases extend the loan tenure.

However, the recent spate of militant attacks in the Delta Region, which has made some players shut down out-rightly has heightened the risk level and in our view may substantially raise banks non-performing loans in the expected Q2 results.

We recall that Aiteo and Agip have shut down production while Shell has suspended exports indefinitely given the frequent attacks on the Forcados Terminal. The shut-down of the Forcados Terminal, which began since February has also affected Seplat's earnings as production down-time is now higher than the earlier guidance by the company.



Who is most at risk?

GTBank has the highest relative exposure to the upstream oil and gas sector, 19% of total loans as at Q1'16. Others with relatively high exposures include Sterling Bank (17.7%), FBN Holdings (17.5%) and FCMB Group (17.4%).

 

GTBank disclosed on its conference call in March that 80% of its upstream oil and gas exposure is to indigenous oil and gas companies while 20% is to International Oil Companies.

 

According to media reports, Aiteo, one of the indigenous oil and gas companies GTBank is exposed to has shut down production. Whilst we do not have the full details (we await clarifications from the bank) of the impact on the bank's books, we generally expect the recognition of some impairment on this loan and anticipate higher non-performing loans on the back of this.  

 

For FBNH, the expected remediation of the Atlantic Energy loan may be at risk with the new development in the Niger Delta. We recall that in February, the Minister of State for Petroleum, Ibe Kachikwu, announced that a new investor is taking over Atlantic Energy's interest (operatorship right of NPDC's working interests in some assets) and will pay off some of the debts owed to banks.

 

FBNH confirmed then that about 53% of Atlantic Energy's exposure to them will be paid down by the new investor with the balance restructured over 2 years. However, on the bank's Q1'16 and FY'15 conference call, management stated that the remediation process stalled but expressed optimism that the process will be successful.

 

As at Q1'16, the bank took a minimal charge on the exposure (as a result of the expected remediation).  With the new risk to the remediation process (if still in progress), FBN Holdings may have to recognize a significantly higher level of impairment than previously expected which will further erode earnings in 2016.

 

Zenith, FBNH and UBA also have some loan exposures to Seplat which has been under major cash crunch with the shut-down of the Forcados Terminal since February.

 

Oil & Gas threat is systemic but we still prefer banks with much lower exposure

 

 

Whilst the threat in the oil and gas sector poses a systemic risk to the banking sector (almost every bank has an exposure to the sector), we believe Tier 1 banks with reduced exposure (not more than 10% of total loans) will be better positioned to navigate the trouble ahead.

 

Therefore, top favourites in the banking sector are Zenith Bank and Access Bank which have 7.9% and 4.6% of their total loans to the upstream oil and gas sector respectively.

 

We await further details to review our valuation on the other banks, especially GTBank and FBNH.

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