By Blaise Udunze
THESE are certainly not the best of times for Nigeria’s financial services sector as there are strong apprehension that the banking sector’s year-end financials could be significantly impaired with negative earnings in results being expected this week.
Daily Sun findings revealed analysts’ concerns on the adverse impact the regulatory headwinds, including the implementation of the Treasury Single Account (TSA), the complete phase out of Commission on Turnover (CoT), foreign exchange challenge and bad debts exposure to the oil and gas would have on corporate earnings.
Economic and financial experts who spoke with Daily Sun expressed worries the policy implementations may impact adversely on banks’ full year results.
Daily Sun checks showed that banks’ performance for the year ended 2015 tended to decline up to 40per cent from 2014 period.
The implementation of the TSA had drained about N2.9trillion from the sector into the apex bank’s vault as at Friday, which the banks could have turn to as an idle funds for transacting business for profits.
Other findings indicated that the global macro shocks will continue to expose the structural imbalance of Nigeria’s economy and the disappointing results will be marked by foreign exchange related financial losses. The exposure to oil and gas sector, which analysts say was responsible for over 40per cent in some banks, has impacted negatively on their earnings, particularly with the decline in the price of oil in the international market.
Already, some banks have commenced downsizing while other are planning to prune down their staff in a bid to cut overheads, as the wave of sacking that characterised the banking sector a couple of years back has not abated with the level of laid off workers in the sector hiking to about more than 1000 within two-month.
Already, profit depression warnings have been announced by two major banks, with First Bank of Nigeria Ltd (FBN), declaring last week that there might be a decline in its earnings in the financial results being finalised for public presentation any moment from this month. This came as First City Monument Bank had come out earlier with a similar warning last month with the announcement of its 2015 nine months results, showing a massive drop in profit.
FBN had attributed the development to a worsening macro economic environment, as well as inclement monetary and fiscal policy, which prevailed since mid last year, Company Secretary, Tijani Borodo, stated in a letter to the Stock Exchange: “Following the preliminary review of FBN Holdings Plc management accounts for the year ended December 31 2015, it is expected that earnings will be materially below that of the prior year.
“The reduction in earnings is as a result of the recognition of impairment charges on some specific accounts resulting from a reassessment of the loan portfolio within our commercial banking business. This assessment was driven by the challenging macroeconomic environment, coupled with fiscal and monetary headwinds, which have resulted in marked reduction in domestic output,” the statement added.
The rising tensions on the financials emerged from the possibility of banks’ non performing loans, exceeding the five per cent threshold is high, a development that may cause some anxious moments in the industry, following the recent declaration by the Asset Management Corporation of Nigeria (AMCON) that it will no longer purchase bad loans.
Also, Head of Research at Sterling Capital Ltd., Sewa Wusu, hinted that almost all the banks operating in the country, both tier 1 and tier 2 banks have to grapple with the reality of these challenges.
According to him, the regulatory headwinds and policy will definitely have significantly downside impact on banks` earnings.
“One will not also fail to mention very quickly that the stiff and challenging operating macroeconomic environment brought about by the decline in oil prices and other factors as highlighted earlier, may also constrained the banks to cut down significantly on overhead expenses including the likelihood of a downsize to contain cost.
“We`ve seen the likes of FCMB Holdings and FBN Holdings groups issuing out profit warnings
to abreast the market on the downside of their earnings expectations based on their exposures to the oil and gas sector of the economy,” Wusu stated.
He, however, hinted that there might likely be some surprises as market eagerly awaits these results.
“We can not rule out the possibilities of some of the banks springing some surprises in terms of dividend declaration to shareholders. Even, if you factored in the mandated regulatory provisions for NPLs and other impairment charges, some of the banks may likely declare dividends. For instance, despite the significant provisions in Q3, 2015, some of the banks like UBA, GTB and even First Bank was well able to increase the level of their profitability at Q3,” the analysts stated.
An analyst at WSTC Financial Services Ltd, Research Division, Olutola Oni argued that there are strong expectation the banking sector’s 2015 full year earnings to be negatively impacted by the phase-out of CoT and sector’s significant exposure to the oil and gas industry.
He is convinced that the foreign exchange scarcity and restrictions in the period would weigh on earnings, likewise marginal impact from TSA implementation as this was compensated for by reduction in cash reserve ratio (CRR).
“In all, we expect resilient earnings from a few names in the tier 1 space,” Oni affirmed.
Head of Investment and Research at BGL Securities Ltd, Mr. Femi Ademola, said that banks with huge exposures to foreign currency liabilities such as on-lending facilities or other types of tier 2 Capital would suffer significant balance sheet effect.
He hinted that banks that grant loans in foreign currencies to local businesses with earnings in Naira would also suffer asset deflation as Naira falls in value.
He explained, “The oil price was definitely unprepared for. Although Nigerian banks lend to oil companies based on cash flow rather than reserves, the average benchmark of $45/barrel has been breached which could mean that some of the assets may become non-performing. And the size of their exposures to the sector despite concentration limits appears to be very significant.”
The analyst further said, “Overall, I expect banks performance for the year ended 2105 to decline but do not expect them to make losses. I also expected that they will make appreciable profit that can be accepted as fair. A decline of up to 40% from 2014 figures appears to be fair in this regard.
“The problem at the moment is economic and regulatory which can be cyclical and not operational. Since these situations can be reversed and very quickly, I don’t think it should affect the workforce. Although it is usual for banks to react to these kind of issues with cost cutting which usually involve staff rationalization, it is not always the right decision and right now, I believe that the situation is too fluid to warrant staff cost.”