Stage two loans could threaten banks’ financial condition

‘Agusto & Co. believes that banks should not be forced to lend as this may encourage weaker risk management practices.
Agusto & Co. Limited

The amount of stage two loans could present a challenge to the asset quality and potential competitiveness of the banking industry, even as steps taken by the Central Bank of Nigeria ( CBN) to support the naira currency could squeeze financial institutions already hit by coronavirus fallout and the oil price shock.

Agusto & Co Limited's opinion was this, recently released its flagship Report on Banking Industry 2020. According to the study, according to the International Financial Reporting Standard ( IFRS) 9, approximately 23 per cent of the industry's gross loans and advances is categorized into stage two category as at 31 December 2019.

The report stated that four out of the twenty-four banks covered in the report had stage two loans to gross loans ratios above the 23 per cent Industry’s average. Stage two loans primarily comprise exposures with an increase in the associated credit risk compared to when the loan was disbursed.

The report said, ‘following the forbearance granted by the Central Bank of Nigeria (CBN) in March 2020, permitting banks to restructure loans to businesses that have been adversely impacted by the novel COVID-19 pandemic, the banking industry had restructured over N7.8 trillion (almost half) of the loan portfolio as at June 2020, according to the CBN.

‘While the forbearance is expected to keep the industry’s impaired loan ratio, which stood at 7.6 per cent as at 31 December 2019, at bay in the short term, Agusto & Co. is concerned about the performance of these affected loans, given that the coronavirus pandemic is yet to be curtailed and a second wave may be looming. A further slowdown in economic activities and a total lockdown may worsen an already bad situation.’

In addition, the research house and rating institution announced that it is targeting a 6% GDP contraction in 2020 while recognizing that if the pandemic lingers, there is likely to be an extension of the time of forbearance.

‘We expect a rise in the impaired loan ratio of the banking industry in the medium term. Our expectations are also driven by the regulatory-induced growth in the loan book driven by the minimum loan-to-deposit ratio (LDR) policy, with sanctions to banks for non-compliance through additional CRR debits.

‘Agusto & Co. believes that banks should not be forced to lend as this may encourage weaker risk management practices. Furthermore, the foreign currency component of these restructured loans, largely in the oil and gas and power sectors, bloat the exposures in the likely event of a further devaluation of the domestic currency,’
they said.

Daily Sun heard that some banks have suggested that they are expecting a hit on their profits. Fitch forecast impaired loan levels to grow sharply in 2020 with Nigerian banks most vulnerable to stress in the oil sector in relation to their peers elsewhere in emerging markets.