Naira devaluation raises bank’s non-performing loans

The volume of non-performing loans in the Nigerian banking sector is set to rise further on the back of the devaluation of the naira amid weak global crude oil prices.

The nation’s weak currency is currently taking a huge toll on companies involved in manufacturing and fast-moving consumer goods, driving down their revenue and bottom line.

Analysts say some of them may not be able to meet their loan obligations to banks as a result of the increase in the cost of inputs.

They said low oil prices, which forced the Central Bank of Nigeria to technically devalue the naira again in February by closing its official foreign exchange window, constituted a major threat to oil companies’ ability to pay up loans.

The CBN had in November 25, 2014 devalued the naira by eight per cent as it pegged the currency at 160-176 to a dollar, triggered by the plunge in global oil prices. Following the closure of the Retail Dutch Auction System, the CBN re-priced the naira at 198 to a dollar.

A non-performing loan is either in default or close to being in default, according to an online finance journal, Investopedia. Once a loan is adjudged non-performing, the odds that it will be repaid in full are considered to be substantially lower.

The Head, Investment Research, Afrinvest West Africa Limited, Mr. Ayodeji Ebo, said spending in the oil and gas sector could push up non-performing loans due to the significant decline in oil prices.

“Some of the expected cash flows from oil firms may have been challenged as a result of the significant decline in oil prices. However, some of the loans may have to be restructured by increasing the duration and decreasing the monthly payments to ensure the loans perform,” he said.

Ebo said several banks had increased their lending to Small and Medium Enterprises as a result of the spread (eight per cent) between the prime lending rate and the maximum lending rate.

He said in order to cover up for some of the CBN policies that had contracted banks’ earnings, the banks needed to lend more to the SMEs at a higher rate than to the corporates, adding that this might also result in higher default rate.

“For some of the banks that are new into that space, may record increased non-performing loans even as the banks try to build competence in this particular space.”

He said, “Cost of inputs to most of the FMCGs have increased because of the devaluation of the naira (27.8 per cent); hence reduced revenue and as a result, there is less of operating profit to pay finance cost and part payment of loans. Apart from potential restructuring of the loans, some of the companies may not be able to meet up, hence delinquency rate may increase.”

Ebo, who stressed that non-performing loans should remain at the five per cent threshold as a result of improved risk management system of the banks, however, said if the loans continued to increase, it would reduce banks’ profits.

“Banks should always improve on their hedging strategy, especially for dollar-denominated loans. So, as they raise more of dollar loans, they should try and reduce the corresponding naira lending from the dollar capital,” he said.

A fixed income and currency analyst at Ecobank, Mr. Olukunle Ezun, said companies who borrowed money in dollar and got their inflows in naira would require more naira to service their dollar-denominated loans.

He, however, said that several banks had asked their customers to re-denominate their loans by converting them to naira.

Ezun said he did not expect non-performing loans to arise on the dollar side, but that on the naira side, there could be some defaults as banks were making moves to increase their lending rates.

A Director at Eczellon Capital, Mr. Seye Sonoiki, said the recent increase in non-performing loans was a function of the overall economy, adding, “When the economy is not productive in the real sense, it affects businesses.”

He noted that the banks’ exposure to the oil and gas and power sectors posed the biggest risk as the banks financed most of the recent asset acquisitions in the sectors.

Nigerian banks financed over 80 per cent of the acquisition of oil and gas assets that were concluded in the past five years, analysts at Ecobank Capital said in a report in January, adding that as of June 2014, loans to finance these acquisitions accounted for over 24 per cent of the loan book of the banking industry.

“Businesses need loans to grow and when they are challenged by several environmental and economic factors, their bottom line will be affected. This will in turn affect their ability to repay their loans,” said Sonoiki.

The Lagos Chamber of Commerce and Industry had last week in its report on the immediate implications of RDAS closure said it would result in the escalation of production cost for firms that had access to the forex window and put the cost increases to 20 per cent.