The nation’s banking landscape is in dire straits, no thanks to the lull in the economy, which has naturally rubbed off on the sector.
For a sector that thrives on growth, only visible in numbers, the numbers, in a manner of speaking, sadly so, are no longer adding up these days.
Expectedly, many players in the banking sector are worried that things may even get out of hand unless as the year progresses.
One of those who have raised his voice above the din over the parlous state of the banking sector is Nnamdi Okonkwo, Managing Director/Chief Executive, Fidelity Bank Plc.
Okonkwo who spoke to these fears on Thursday in Lagos, at a forum to mark Fidelity Bank’s 27 years anniversary, said the first half of 2015 was very tough for the banking industry as a result of the global headwinds as well as regulatory pressure.
Like Okonkwo, many bankers are equally worried that it is no longer at ease with their sector, what with the dwindling fortunes being recorded by many thus far.
Genesis of crisis
It may be recalled that the Central Bank of Nigeria CBN) made some policy pronouncements late last year including the review of capital adequacy ratio 15 per cent.
The withdrawal of public funds from the money deposit banks among others.
The apex bank also devalued the naira amid growing domestic and international concerns about the tough outlook facing the Nigerian economy after the collapse of oil prices last year.
Justifying the need for these policies, the CBN governor, Godwin Emefiele in an interview said that given the major hit to state revenues for the continent’s top oil producer, there was no way to avoid “bad times” for now.
But he insisted his policies, and not the naira devaluation traders and analysts call for, would curb inflation and bolster depleted foreign reserves.
“We have begun to get people to refocus . . . the challenges of the dwindling reserves [are] making people change their paradigms because we are telling people our story and they are beginning to look inwards,” he said.
Emefiele also dispelled fears that the central bank was overreaching itself and getting involved in industrial policies, stating that beyond the mandate of the CBN to provide price and monetary stability and forex management, it was also the responsibility of the central bank to take actions that would achieve macroeconomic stability.
“In an attempt to achieve macroeconomic stability, you must take actions that impact positively on the lives of your people. And any monetary or fiscal authority will do that. In the United States, everything is (about) ‘jobs, jobs, jobs’.
“The Federal Reserve talks about jobs. Every month, Janet Yellen comes and talks about employment. So if you are saying that it is not within the mandate of the central bank governor to put in place policies that will increase job creation, reduce unemployment, increase economic growth and development then you are not right.
“So what we are doing is taking actions and decisions that will improve the lives of the people and that will make our people look inwards. And those things we are importing right now, we are taking action to say produce them locally, and in the process you create jobs for our people and in the process you are growing the economy.”
On the current volatility in the parallel forex market, the CBN governor maintained that informal market was shallow and should not serve as a benchmark for determining the real value of the naira.
Emefiele also insisted the restriction placed on importers of the 41 items had not added depth to the parallel market, stating: “It’s not the policy we introduced in June that is causing it. It is because of the speculative activities, the round-tripping and rent-seeking activities of certain people in the economy that is creating this.
Besides, the apex bank capped it all with other new policy regime in recent times, including the single treasury accounts, restriction on forex among other policies, may have had adverse effect on banking operations, which rely on cash flows from various economic sectors.
Indications that Nigerian banks may be heading into storms as the year progresses is becoming clear if the observation of Financial Institutions is anything to go by.
In its latest report released by the Director, Financial Institutions, Mahin Dissanayake, Fitch Ratings insisted that Nigerian banks are highly exposed to the domestic market and that the economic slowdown would affect their performance.
Subsequently, the Fitch has warned that Nigerian banks are heading into financial and operational storms in view of what it called the increasingly difficult conditions under which they are operating.
It made it clear that the difficult times are likely to result in a sharp deterioration in profitability, asset quality, liquidity and capital ratios.
“We said the sector outlook was negative in December. GDP figures for 2Q15, released yesterday, show weaker year-on-year growth of 2.4 per cent, down from four per cent in the previous quarter, the slowest quarterly growth rate for over 10 years.
“The volatile operating environment is highly important in determining ratings for all Fitch-rated Nigerian banks, keeping their Viability Ratings low, in the highly speculative ‘b’ category.
“Nigeria’s oil sector growth slowed in 2Q15 and non-oil growth was just 3.5 per cent, down from 5.6 per cent in 1Q15. Part of this slowdown was caused by temporary fuel shortages, which caused industrial production and manufacturing output to contract. Lower oil prices, reduced government spending and restrictions on foreign exchange availability are also taking their toll on performance across the economy. Positively, agricultural output, construction, telecommunication services, internal trade and financial services continued to grow.
“Nigerian banks have had to contend in recent months with the increased vulnerability of the oil and gas sector, pressure on the naira, the slower economy and tightening bank liquidity. These are all credit negative for the sector. Since the beginning of August, public sector deposits, which represent around eight per cent of total system deposits, have exited the commercial banks and must be held at a single treasury account at the central bank. This adds pressure to liquidity. No significant changes in economic policy have materialised following the change of government at end-March 2015, but until a new cabinet is formed and a clear policy framework is announced, uncertainty will weigh on the outlook.
“Loan growth contracted in 1H15, which is likely to translate to weaker bank financial metrics for the year. We believe sector non-performing loans will rise above the central bank informal cap of five per cent but below 10 per cent of total sector loans by end-2015. Regulatory capital adequacy ratios are likely to fall further due to lower earnings, weaker asset quality and a limited ability to raise capital. Tier 1 capital ratios could fall below 15 per cent for many banks, which is low by historical standards for Nigeria.
“In our opinion, key financial metrics reported by Nigeria’s banks are likely to continue to decline in the closing months of 2015. A prolonged economic downturn would likely put pressure on bank ratings.”
CBN may throw in the towel
Apparently discomfited with the refusal of banks to carry out their core mandate, which includes lending support to drive economic sectors, the CBN said hinted that bailout from the apex bank may no longer be feasible.
Giving this hint in Abuja, the Assistant Director Development Finance Department of the CBN Mr. Jonathan Tobin at a workshop for Micro Small and Medium Enterprises (MSMEs) funding organised by the Bankers’ Committee, lamented that intervention will not be forever.
“A day will come when we will close the tap and you will be compelled to lend from your balance sheets. We want to encourage banks to lend.”
Many banks, the CBN regretted, are not participating because CBN said they should lend from their balance sheets. They don’t want anything to tamper with their balance sheets but immediately it is an intervention fund from the CBN, all banks will jump at it.”
Tobin lamented that the Nigerian “economy is virtually dying but the banks are declaring billions as profit. But they forget that if the economy collapses everybody will be the worse for it. We have to take some risks.”
Clear and present dangers
In the view of financial analysts, the banks are not in the clear as far as their health is concern.
Sola Alabi, Zonal Manager, Wema Bank Plc, while attempting a prognosis of the imminent crisis in the nation’s financial service sector said the overexposure to risk by some of the banks may have been responsible for the poor showing of banks in recent times.
According to him, “most of the banks are weak there is no doubt about that. You find that majority of them in their craze for deposits drive finance some projects, especially in the oil and gas sector, where price volatility is now a major problem so, naturally, many recorded losses. The size of their balance sheet is lean.”
Corroborating Alabi, a staff in one of the old generation banks, who asked not to be named, confided in The Nation that the outlook of the banks leaves nothing to cheer about.
“Majority of our banks have had to contend in recent months with the increased vulnerability of the oil and gas sector, pressure on the naira, the slower economy and tightening bank liquidity,” he said.
All this pose negative effect for the sector, he maintained.
“It is very disheartening to note that since the first quarter of this year, public sector deposits, which represent around eight per cent of total system deposits, have left the commercial banks and must be held at a single treasury account at the central bank. This adds pressure to liquidity.”
A lot of people, the source said, looked forward to some economic policy changes with the change of government but so far, no significant change has happened, fueling fears that things make progress negatively for the sector.
However, the question on the lips of many is whether the banks are still safe havens.
Time will tell.