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Banks face new risks over oil price decline

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By Collins Nweze

 

Drop in crude oil prices to $28 per barrel, far below $40 to $50 per barrel,  the rate at which banks hedge their exposures, presents new risks for the finial sector, The Nation has learnt.

Nigerian banks are still trying to recover from an economic contraction in 2016 now face a triple whammy of coronavirus, plunging oil prices and volatile markets that could further delay progress.

Bloomberg report said the 2014 collapse in crude dried up foreign exchange in Africa’s biggest producer of the commodity, resulting in the first recession in 25 years and a currency devaluation. Businesses struggled to make repayments, heaping piles of toxic loans onto the books of lenders.

The conditions, “pose downside risks to the profitability of banks in 2020, mainly given the likely impact on asset quality and loan growth,” Aderonke Akinsola, a banking analyst at Lagos-based Chapel Hill Denham told Bloomberg. “Capital adequacy ratios of banks are more at risk amid the current macro realities,”he added.

The Central Bank of Nigeria (CBN)  announced the extension of a one-year moratorium on the repayment of all principal debt repayments among a range of measures to buffer the economy against the impact of the coronavirus.

Oil has slumped to around $31 a barrel, below the government’s $57 target, amid a price war between Saudi Arabia and Russia, and as widening global efforts to fight the spread of the coronavirus risks triggering a drop in demand.

If oil prices remain at current levels for the next two quarters, the banks’ problem-loan ratios could rise beyond the initial expectation of six to eight per cent , according to Moody’s Investors Service. The banking industry’s non-performing loans as percentage of total credit dropped to 9.3 per cent as at mid-2019 from 12.5 per cent a year earlier. The regulator wants it below five per cent.

Most Nigerian lenders have their oil exposure hedged at $40-$50 a barrel, which will mean they would have to make provisions if prices remain where they are, said Emmanuel Adeleke, a banking analyst at ARM Investment Managers in Lagos. He “expects flat growth in earnings for most banks this year”.

 

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