Posted by Tony Chukwunyem
With the Asset Management Corporation of Nigeria (AMCON) firmly ruling out the possibility of its resuming the purchase of banks’ non-performing loans (NPLs), some lenders are coming up with new strategies to deal with the rising volume of bad debts in the industry, New Telegraph has learnt.
At a recent conference in Lagos, the Chief Executive Officer, Ecobank Transnational Incorporated (ETI), Mr. Ade Ayeyemi, said he expected the pan-African lender to be back in the black this year, after it decided to absorb NPLs from its Nigerian unit – Ecobank Nigeria – through a “bad bank” to enable it compete.
Nigeria accounts for 40 per cent of ETI’s revenues and is in its second year of recession, as lower oil prices caused chronic dollar shortages that hurt businesses and households.
The lender said it swung to a loss before tax of $131.3 million in 2016, from a profit of $205.2 million a year earlier, adding that its performance was also hit by charges as a result of a rise in NPLs, which climbed to 9.6 per cent of total loans in 2016 from 8.9 per cent a year ago.
Ayeyemi said the bank planned to raise $400 million via a convertible bond issue, adding that $200 million of the cash raised would repay funds used to set up a “bad bank’ to resolve NPLs.
In its financial statement for 2016 the management of ETI had explained that as part of a clear and well-defined non-performing loan strategy, loans with a book value of N52 billion or $263 million were transferred to a separate entity referred to as Resolution Vehicle during the fourth quarter of 2016.
The pan-Africa bank said: “The establishment of the Resolution Vehicle will help to effectively manage capital, enhance a quick turnaround of our business in Nigeria and help to improve transparency of the non-performing loans portfolio in Nigeria.”
It said: “We commenced the process of NPLs sale initiative with initial application to the Central Bank of Nigeria (CBN), following which regulatory consent was received in March 2016.”
Similarly, another lender, Unity Bank, whose 2016 results were negatively impacted by a 53 per cent increase in its bad loans to N369 billion from N241 billion in 2015, also introduced a new strategy of resolving the issue by signing a sales and purchase agreement with a private firm, Frontier Capital Alternative Asset (FCAA), in respect of its bad debts.
The lender stated: “As at February 2017, a ‘good faith’ payment by the loan purchaser has been received, representing a percentage of the initial consideration to the bank in respect of the transaction and execution of completion timetable for the final loan rights transfer from the bank to the purchaser with closure date in the second quarter of 2017.”
It further said that “NPLs sales proceed with initial consideration payment of N6.43 billion and cash flow waterfall of circa N60 billion over the five-year period.
The cash flow will impact on capital positively over the period, which will benefit the entire shareholders of Unity Bank (both existing and potential investors).”
According to the CBN’s Financial Stability Report (FSR), the NPL ratio of Nigerian banks rose to a five-year high of 14 per cent at the end of December 2016, the worst ratio recorded by the country’s lenders since 2012 when the NPL ratio was just 3.7 per cent.
The data showed that the NPL ratio more than doubled its December 2015 level of 5.3 per cent. NPL ratio indicates the average level of bad loans on the books of banks.
It is a key indicator of the health of the financial industry as the higher it is, the more likely that a bank will run into solvency challenges.
The banking watchdog has blamed the deterioration in asset quality to the rising inflationary trend, negative Gross Domestic Product (GDP) growth and the depreciation of the naira.
Indeed, the banking watchdog’s FSR for the first half of 2016 had stated: “Non-performing loans in the period under review grew by 158 per cent from N649.63 billion at end-December 2015, to N1,679 trillion at end- June 2016.
The industry-wide NPL ratio rose to 11.7 per cent from 5.3 per cent, thus exceeding the prudential limit of 5.0 per cent.”
Besides, the report noted: “At end-June 2016, loans to the oil and gas sector constituted 28.77 per cent of the gross loan portfolio of the banking system as credit to that sector grew to N4,511.34 billion, compared with N3,307.87 billion at end- December 2015. Loans to state governments rose to N1,386.61 billion from N1,053.97 billion at end-December 2015, as declining revenues continued to constrain payment of salary by some states, funding of key services and execution of developmental projects.”
Interestingly, global credit rating agency, Moody’s Investors Service, had, in a report on the country’s banks published late last year, stated that it expects NPLs to increase to around 12 per cent over the next 12 months.
The agency said the forecast rise in NPLs stems from lower oil prices, a weakening naira, slower GDP growth and rising inflation.
It also stated that it expects foreign currency deposits, which have fallen around 30 per cent since the start of 2015, to stabilise over the next 12 to 18 months, as the impact of lower oil prices and the CBN’s adoption of a Treasury Single Account (TSA) fades.
However, Moody’s said it expects loss absorbing capital buffers to hold steady on account of muted loan growth of around five -10 per cent over the next 12 to 18 months. It will be recalled that AMCON, which was set up in 2010 to absorb bad loans during the country’s financial crisis, has stopped buying NPLs from lenders.