Nigerian banks boost buffers against potential bad loans

Nigeria’s biggest banks boosted provisioning against potential loan quality deterioration, even as high foreign-exchange gains and interest income drive drove profitability, Moody’s said on Friday.

It said in a new report that their aggregate loan loss provisions amounted to N116 billion in the first quarter of 2024, 140% higher year-over-year, following a fourfold jump to N875 billion during 2023.

The lenders are Access, First Bank of Nigeria, Zenith, Guaranty Trust Bank (GTB) and the United Bank for Africa (UBA).

“Annualised cost of risk ranged between 0.1%-2.5% in Q1 2024 and 1.1%-7.5% during 2023 as most banks reported considerably higher levels of provisions to shield against potential asset risk following prolonged periods of high inflation,” Lynn Merhi, senior ratings associate at Moody’s Ratings, said.

She said the considerable increase in provisioning was facilitated by strong foreign-currency-related earnings, some of which was used to build buffers against future potential loan quality deterioration, prompted by the lagged impact of prolonged exposures to devaluation and inflation on borrowers’ repayment capacity.

“Additionally, some banks opted to match the provisioning cover on foreign-currency-denominated loans in proportion to relative increases in the naira value of the underlying loan as the naira depreciated. In terms of asset quality, nonperforming loan ratios remained modest and ranged between 3.1%-6.2% during 2023,” she said.

However, elevated credit risk is apparent in the sizeable balance of Stage 2 loans, which averaged about 19% of total loans during 2023, and the considerable proportion of foreign-currency denominated loans which averaged 52% of the loan book across the five banks, according to the report.

Zenith’s annualised cost of risk, the highest among peers in 2023, moderated in Q1 2024 compared to a peak of 7.5% during 2023 as higher operating income was utilised to increase impairment charges against potential pressures on the credit quality of its Stage 2 loan book, Moody’s said.

It said: “GTB, UBA and FBN’s cost of risk also jumped from lower levels during 2023 as strong operating income was utilised to shield against potential deteriorations in the quality of their Stage 2 loan books.

“Access’s cost of risk remained the lowest among peers during 2023, in line with management’s prudent risk management strategy reflected in the considerably lower proportion of non-performing loans of and Stage 2 loans compared with peers.”

The rating agency said the lenders’ strong profitability was largely driven by one-off foreign-exchange gains and supported by sound net interest margins.

Aggregate Q1 2024 net profit tripled to N1.24 trillion compared with the same period last year. In 2023, net profit doubled and return on assets ranged between 2.3% and 6.7%.

It said operating expenses increased sharply amid rising inflation and currency devaluation, with the aggregate operating expense rising to N1 trillion in Q1 2024 because “strong balance sheet growth increased bank regulatory charges and the combination of a weaker naira and inflation increased personnel expenses and foreign-currency-denominated fees.”

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