- Full provisions for foreign loans * GMD/CEO asset declarations
Paul Ikechukwu
Palpable fear has engulfed Nigerian banks over the troubling guidelines of the Central Bank of Nigeria (CBN) which appear to heap more responsibilities on the Deposit Money Banks.
These new guidelines which include full provisioning for foreign loans, one off writing-off of bad loans and compulsory assets declaration assets by bank workers, many believe would impose additional burdens on the DMB’s that are already struggling to survive the depressed economy even as they struggle to keep pace with numerous policies which seek additional responsibilities from financial institutions that are already weary of the stifling operating environment in the country.
This is also at a time when several banks in the country that had acquired foreign currency denominated loans such as Eurobonds are panicking over their exposure in view of the declining value of the local currency.
Their anxiety is coming in the wake of a Central Bank of Nigeria, CBN directive that banks with exposure to foreign currency loans should make adequate provisions for them. This burden is also coming at a time when the apex bank has instructed the DMB’s to do a one-off writing- off of bad loans, in addition to the guideline that Group
Managing Director/ Chief Executives and other bank workers must declare their assets.
These have generated grave fears among bank workers, especially top officials who own assets that are generally believed to be beyond their means.
By the CBN circular also, experts suggest that that some banks foreign currency loans carrying value may be overstated.
The directive and its implications raises fresh concern over the health of the sector, raising the sceptre of the need for stress test as almost half of the banks in the sector have dollar-denominated
debts, the quality of which cannot be determined as totally performing.
FCY loans provisioning is necessary due to the new FX regime as which has brought imbalance in their books as against earlier provisioning which used N197/$ at official exchange rate.
Last week, the naira was trading at N310 per dollar. Banks such as GTBank, Diamond bank, FCMB, Access bank, ECOBank etc. all have foreign currency debts.
It was gathered that the regulatory expectation for fresh provisioning may not be unconnected with performance of the economy. Private investment has been brought to its knees for years as economy performs below expectation while growth outlook blurs.
Due to woes that betide the economy, banks as the major economic support pillars have been facing a number of issues including low business patronage and upsurge in non-performing loans.
There have been high default rate on the part of customers to meeting their interest payment obligations as well as principal repayment.
Oil and gas investments that received very high financing support from the banks are returning low. Thus, most activities in the banking sector are more of loans restructuring rather than new business.
Thus, raising an assessment of the amount to be provisioned will place additional burden on the banks.
Analysts are also saying that the magnitude of the effect would differ from one bank to another.
They say it depends on the FCY loans proportion of a bank total loans portfolio. Most banks in the economy are exposed to downstream and upstream oil sectors. FBNH, Sterling, SKYE, Diamond, GTB, Zenith and others are few on the top rank.
But analysts are wary about the impact on FX market as the regulatory demands for provisioning may weigh heavily on ability of naira to sustain pressure without support. The need for the affected banks to source for greenback to meet the short term need will widen demand side while supply side stays, with negative effect on the value of naira.
“The apex bank circular indicates that FCY accounts are exposed to risk brought about by devaluation as well as declining global oil market performance”,Mr. Jide Famodun stated.
“It is reasonable to believe that banks FCY loans carrying value on their books are significantly below the fair value assuming it is open to trade.
Thus, international Financial Reporting Standards support such to be done at least ones a year to determine if the loan assets for example has been impaired”, he added.
Banks are expected to make the provision on their existing foreign currency loans (FCY) carrying value in order not to overstate the operators’ profit. The price negotiated and agreed with clients may have dropped as a result of inability to meet short term obligation to the banks.
This demand on fair value adjustment to operators’ foreign currency loans exposure is expected to impact their results starting from the third quarter of financial year 2016.
Last week, the Central Bank of Nigeria (CBN) urged banks to review foreign currency denominated loans in line with the Prudential Guidelines for Deposit Money Banks in the country. CBN issued the Revised Guidelines for the Operations of the Nigerian interbank foreign exchange market to enhance efficiency in the market. The directive was born out of the need to facilitate liquidity and transparency in the foreign exchange market.
Analysts are of the opinion that this would mean provision for fresh non performing loans coming from foreign currency denominated exposure. Already, the industry non performing loans have beaten the regulatory standards.
“The resultant impact is in many folds. First, it means a cut in the affected banks’ year-end earnings declaration. It also means that banking sector stock performance will be affected for low earnings and weakening fundamentals. Apart from that, there is investors behaviour aspect that cannot be quantify as return on equity may not match with the risk”; says SCP Professionals.
In few years back when the tone of economic prosperity was high, and the need for expansion was central to banking operations, some banks went offshore to access finance at Eurobond market to meet their financing needs.
Mr. Toyin Idowu, a senior financial consultant said that this will increase demand for greenback, with possibility of pressuring the market on the back of volume that may be involved.
The period witnessed surge in foreign currency loans relative to domestic lending. However, the twist in economy couple with explicit and tacit devaluation of local currency put the banks on a rough side of the transactions edge.
The apex noted in its circular that one of the effects of the guidelines which liberalized the foreign exchange market, is the increase in balances on foreign currency-denominated loans and advances in the books of banks.
It however said that the exercise included facilities that had been fully provided for under the previous exchange rate regime, but were yet to be written off per extant regulation under Section 3.21(a) of the Prudential Guidelines.
The guideline added that evidence of the additional provisions be forwarded to the Director of Banking Supervision within a week of the issuance of the circular.