Rising impaired loans in Nigerian Banks: Fallout of Policy Changes

Nigeria’s banking sector finds itself at a crossroads as it grapples with a significant surge in impaired loans, a fallout from recent policy changes and macroeconomic headwinds.  

The devaluation of the naira, the fuel subsidies removal in 2023, and soaring interest rates have collectively contributed to heightened inflation, creating a high-risk environment. 

This economic landscape has resulted in the inflation of banks’ foreign-currency (FC)-denominated risk-weighted assets (RWAs) when measured in naira terms, the FC-denominated problem loans and a strain on borrowers’ debt servicing capacity. 

This, in turn, has led to a noticeable uptick in the prudential provisions that banks are obligated to maintain against these loans, a trend that manifested in the reported loan impairments during the initial nine months of 2023. 

In the first three quarters of 2023, banks experienced a notable surge in impaired loans. For example, impairments associated with loans and advances to customers of FUGAZ (FBNH, UBA, GTCO, Access Holdco, and Zenith Bank) saw a staggering 302% year-on-year increase, totalling N553.658 billion. 

Likewise, in its 9M 2023 financial report, Ecobank Transnational revealed that its Nigeria region recorded a net impairment charge on loans of $25 million, marking a 92.31% increase from $13 million in the previous year. This change reflects additional impairment charges on specific loans

The market is now abuzz with anticipation regarding the continuity of this trend for the last quarter of 2023 FY.  

Concerns linger that the surge in impaired loans may persist, thereby extending the impact of the policy changes. 

Analysts predict that these challenges are likely to influence the net interest income after impairment for the full year of 2023, building on the impact witnessed in the preceding quarters of 2023.  

In the first nine months of 2023, for example, Tier-1 banks, driven by provisions, reported a moderated growth in net interest income after impairment charges, recording an 18.1% year-on-year growth, reaching N1.348 trillion. Notably, Zenith Bank experienced the most pronounced impact, with a 16.5% year-on-year decline in net interest income after impairment charges during this period. 

Notwithstanding, it’s crucial to highlight that the overall bottom-line performance of Nigerian banks in the first nine months of 2023 remained impressive.  

FBNH, UBA, GTCO, Access Holdco, and Zenith collectively reported a profit before tax of N2.019 trillion during this period, reflecting a significant 164% year-on-year growth. This can be primarily attributed to substantial gains in foreign exchange.  

The surge in loan impairments and the anticipation of a continuous increase signal numerous challenges and potential repercussions for both the banking sector and the broader economy.  

A substantial rise in loan impairments often mirrors economic stress and uncertainty, signifying that, borrowers, including individuals and businesses, are encountering difficulties in meeting their debt obligations.  

For the banks, an increase in loan impairments poses a significant risk to their financial health. The necessity to allocate substantial provisions for impaired loans can impact various aspects, including profitability, capital adequacy, and liquidity.  

Moreover, it may prompt the banks to adopt more conservative lending practices, leading to a tightening of lending standards.

This, in turn, could make it more challenging for businesses and individuals to access credit, potentially impacting economic growth. 

No doubt the naira devaluation, petrol subsidy removal, hike in interest rates and consequent high inflation rates have created winners and losers.  

From the perspective of banks’ bottom-line performance, it appears that the gains for the winners have, so far, outweighed the setbacks faced by the losers. 

However, it is crucial to exercise caution and implement additional risk management measures to curtail the rising non-performing loans and their impact on asset quality, capital ratios and investor optimism. 

The performance of banking stocks has been impressive. In the previous year, the average Year-to-Date (YtD) share price gain among the 13 listed banks was an impressive 123%, with UBA leading the pack by posting the highest YtD share price gain of 238%.  

In the current year, the banking sector has sustained its impressive momentum, showcasing an average Year-to-Date (YtD) gain of 31%. 

Nonetheless, the escalating loan impairments may usher in a more prudent perspective. Investors may reassess their holdings, contemplating the potential repercussions on the financial standings of the banks. Such reconsideration could lead to a change in sentiment and a more calculated approach.